Sasfin Global Equity Model - Quarterly Review - Q3 2022

Global equity markets fell for the third straight quarter as the MSCI All Country World Index, a broad measure of global equity markets, declined 6.8%. Central banks around the globe continue to increase interest rates in an attempt to tackle soaring levels of inflation. The trajectory of stock prices and interest rates are typically inversely related. Rising interest rates tend to lead to lower stock prices as the value of future profits generated by the companies are reduced owing to higher interest (discount) rates.

The US Federal Reserve (“Fed”) has raised its benchmark rate by a cumulative 300 basis points year-to-date, with half of that increase coming through in the third quarter but we are yet to see a meaningful decline in the rate of US inflation. While this remains the case and unemployment levels remain low, there is a high likelihood that the Fed will maintain its aggressive hawkish policy and uncertainty will persist as to when the US has reached the end of its rate hiking cycle. Comments by Fed chairman Jerome Powell stating that monetary policy needs to be “more restrictive for longer” further underpins this possibility.

Inflation is running even hotter in Europe which has forced the European Central Bank (ECB”) to raise its benchmark rate above zero for the first time in a decade. ECB president Christine Lagarde has signalled that there would be more interest rate hikes over the coming months in a bid to bring inflation back down to the central bank’s target level of 2%. A tall order with inflation in the region hovering around 10%, spurred on by the ongoing energy crisis which may likely worsen as Winter draws nearer.

The third quarter has been particularly challenging for Chinese equities. Stock price falls were broadbased fuelled by the property sector crisis that the country is currently experiencing. Homebuyers are refusing to pay mortgages on unfinished homes which has sent the stock prices for property developers tumbling but stocks in other sectors have also been dragged into the negative spiral. Negative sentiment has also been exacerbated due to large parts of the country being placed into stringent lockdowns under China’s zeroCOVID policy. Even reassurances from Beijing that the crackdown on big tech companies would be relaxed did little to help.

The rapid rise in rates during the quarter meant that there were few places to hide, Bonds endured a negative period with the Bloomberg Global Aggregate Index, a broad measure of global bonds, declining 7%. Commodity prices were also weaker during the third quarter with the S&P GSCI, a broad measure of global commodity markets, falling 14%. The slump in the price of oil during the quarter was certainly noteworthy as the prices of Brent Crude and WTI fell by more than 25% as expectations for oil demand softened owing to lockdowns in China and the increasing likelihood of a recession in Europe as well as the US.

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