September Market Review

Welcome to our latest report where we provide you with the means to keep informed of the latest economic and investment market conditions.In this report, we set out our views on the current environment and the challenges and opportunities that lie ahead for investors over the next twelve months.

Our aim remains the same, to keep you updated on such matters leading to better investment decisions and by extension more acceptable returns on employed capital.If you have any questions do not hesitate to reach out to our team.

Have policy rates increased enough?

In our last report, we noted how impressed we were by the global economy’s continued resilience in the face of one of the fastest monetary policy tightening cycles on record. In the US for example, while 525 basis points of rate increases by the Federal Reserve since March 2022 have impacted the housing and manufacturing sectors to a degree, more broadly, unemployment rates remain low while CPI inflation has fallen significantly. The Fed remains on track to deliver a soft-landing, a feat few believed possible a few short months ago. At the recent gathering for global central bankers at Jackson Hole, Jerome Powell reiterated his commitment to maintaining a tightening bias until his 2% inflation target has been achieved. He must be quietly pleased with his progress to date.

While wage growth and consumer spending trends remain elevated, there are early signs of a slowdown in income growth and a rise in savings, which will be needed for inflation to continue to decline. Nominal spending levels have also cooled recently but remain elevated. The likely result will be a Federal Reserve that keeps interest rates higher for longer, without having to increase rates much further from here. The tightening already in place is still taking effect, making credit more expensive, reducing demand, and causing businesses to cut back. This should continue to pressure households in the months ahead.

In Europe, Managers see some similar promising trends unfolding on the macroeconomic front. Unemployment rates remain low and inflation continues to decline. Economic growth rates however remain tepid. Energy demand is a key variable in the discussion on regional economic growth trends and here, Europe has a glaring weakness. While the US is a net energy exporter today, Europe must import the majority of its energy needs and is therefore dependent on market forces to a large degree. Economic activity is energy transformed and here Europe is vulnerable to the continuing trend of rising oil and natural gas prices, which we foresee.

Higher for longer

Despite the weaker outlook for Europe, Managers remain constructive in their overall view. The belief exists that the policy tightening already in the system will be a headwind for growth over the next twelve months, but not enough to cause a recession. Jerome Powell will continue to work to deliver his soft landing, focusing on reducing demand for labour without causing a rise in unemployment. So far, so good. Since peaking in March 2022, job openings, for example, have fallen over 25%. This should put downward pressure on wage growth over time.

Equity markets continue to perform in line with consensus expectations this year and are pricing in an increasing chance of the soft-landing Powell is targeting. The global equity benchmark has returned +11% year-to-date in euro terms. Bond markets have also begun to discount a more positive economic outlook. The US dollar has rallied since our last update but may be making another ‘lower high’ on the chart. Managers continue to hold the view that the greenback has topped for the year and should continue to weaken in the months ahead. Fiscal imprudence, political uncertainty ahead of the 2024 US election and an end shortly to the interest rate rising cycle drive a negative USD view.


Annualised performance data in euros at 25th August 2023

With short-dated government bond yields approaching 4% in the EU and over 5% in the US, conservative investors now have a real option to generate a return on their hard-earned capital. Irish banks are also finally passing on some of the recent ECB interest rate increases to depositors, which is a very welcome, if a belated  development. That is where the real value ends however in the fixed income market.

Despite the rise in short-term rates this year, longer-term bonds remain unattractively priced and the yield curve remains inverted. In the US, the gap between 2-year yields (4.9%) and 10-year yields (4.2%) remains 70 basis points. This gap needs to be closed. Economic growth remains healthy, unemployment rates are at record lows and energy prices continue to rise. This is not a bond-friendly environment.

US long-duration Treasuries are considered the world’s reserve asset of choice, yet they have plunged in price in recent years, declining over 40% since 2020. This is a large and growing problem for the US, particularly as their budget deficit is surging due to out-of-control government spending. The supply of US Treasuries into a weak market is about to accelerate. The US is scheduled to issue $1.9 trillion in new government bonds in the second half of this year to finance the gaping hole in its finances. This is at a time when international buyers of US Treasuries are cutting back. China has already reduced its US Treasury holdings from over $1.2 trillion to $860 billion. There are no signs that this trend is about to reverse. Caveat emptor.






Annualised performance data in euros at 31st August 2023

The last three years have provided us with some of the most volatile periods of inflation in decades. How has inflation impacted equity performance during this time and how will inflation continue to impact equity returns going forward? In general, equities tend to do better than cash and bonds during inflationary periods but underperform real assets like commodities. This is the case as long as inflation does not become a persistent problem over time.

During the initial phase of an inflationary period, equities tend to perform quite well. Rising inflation generally leads to rising nominal demand and rising corporate sales and profits. Companies tend to pass on cost increases to customers and therefore maintain healthy corporate margins. However, rising inflation eventually leads to rising interest rates as central banks tighten monetary policy to ensure price stability.

This cycle, equities have performed well to date, despite multiple interest rate increases. The US consumer has been a leading source of resiliency in the economy. US household consumption continues to be the largest contributor to quarterly economic growth. Corporate revenues and earnings have been robust. As such, Managers continue to maintain a more positive view on equities.

We have pointed to a slowdown in job openings in recent months and also note that credit card delinquency rates have also picked up recently. So, perhaps the US consumer is starting to feel the pinch. Consumer confidence levels may also have peaked for this cycle.

Outside the US, Japan continues as this year’s best performer, +12% year-to-date in euro terms. European equities have added +10%, UK equities +3% while emerging markets have gained just +2%, with China continuing to be the key underperformer in Asia.

China’s ongoing problems are largely property related. After a decade long bull market in real estate, the air is coming out of the sector, causing problems some for President Xi Jinping and his citizens. A number of China’s largest real estate developers recently filed for bankruptcy. It will take years for the excess to be worked out of the system. The Shanghai Composite Equity Index has gone nowhere in over a decade, despite robust economic growth during this time. Some suggest the Chinese miracle has been illusory and has led to the enrichment of the corporate and political classes at the expense of the Chinese people. President Xi has a problem on his hands. GDP growth is falling. Youth unemployment is uncomfortably high. A currency devaluation may be considered to improve export growth and boost GDP. While this would benefit the corporate sector, a weaker currency makes goods and services more expensive for Chinese citizens. A devaluation of the yuan versus the US dollar would also have the practical effect of exporting deflation abroad, which would adversely impact equity markets should it occur. There are no easy solutions here.

Emerging market equities are attractively priced today and should benefit from a falling US dollar. However, we would recommend avoiding Chinese equities when looking for opportunities in Asia.


Annualised performance data in euros at 31st August 2023

‘Doctor Copper’, the industrial metal with a PhD in economics, is so named, as this widely used industrial commodity is highly correlated with the business cycle. Copper tends to rally during periods of economic strength and then decline during times of economic weakness. When measured versus gold, the monetary metal, the copper/gold ratio provides a good barometer of the health of the global economy. Rallies in the ratio coincide with periods of economic growth and/or rising inflation. Declines coincide with periods of economic weakness and/or falling inflation.

After the post-covid surge in 2020 and 2021, the copper/gold ratio declined in 2022 as the global economy weakened and inflation fell. In 2023, the ratio has stabilised. We are watching closely to see what the good doctor will prescribe for the remainder of this year and into 2024.

We will end this report with some final thoughts on the energy sector. At the time of writing our July update, crude oil prices were trading at approximately $70/barrel. Today, Brent crude oil prices are trading at $95/barrel and those poor US Treasury bond holders continue to suffer. The global economy (ex-China) remains resilient, energy demand remains robust and inflation, while falling, is still too high. The current market remains a positive one for equity, energy, and commodity investors and a challenging one for those focused on fixed income.

Sector in Focus

What is AI and What’s All the Fuss About?

Artificial Intelligence, often abbreviated as AI, has permeated nearly every aspect of our lives in recent years. From self-driving cars and virtual assistants to medical diagnostics and entertainment recommendations, AI is making a profound impact on society. But what exactly is AI, and why is there so much excitement and concern surrounding it?

At its core, Artificial Intelligence refers to the development of computer systems that can perform tasks that typically require human intelligence. These tasks include problem-solving, understanding natural language, recognising patterns, and making decisions. AI systems use a variety of techniques, including machine learning, neural networks, and deep learning, to achieve these functions.

AI can be categorised into two main types:

Narrow AI (or Weak AI): Narrow AI is designed for a specific task or set of tasks. It excels in those tasks but lacks general intelligence. Examples include voice assistants like Siri and recommendation algorithms used by streaming services.

General AI (or Strong AI): General AI, often portrayed in science fiction, refers to AI systems with human-like intelligence and the ability to perform a wide range of tasks, learn, and adapt. General AI remains a theoretical concept and is not yet a reality.

Real-World Applications of AI

AI is no longer confined to the realm of science fiction; it is a part of our everyday lives. Here are some notable applications:

  1. Healthcare

AI is transforming healthcare by aiding in disease diagnosis, drug discovery, and personalised treatment plans. Radiology AI can analyse medical images like X-rays and MRIs to detect abnormalities, while AI-driven chatbots can provide medical advice.

  1. Autonomous Vehicles

Self-driving cars, powered by AI algorithms, use sensors and real-time data to navigate roads safely. Companies like Tesla and Waymo are at the forefront of this technology.

  1. Natural Language Processing

Virtual assistants like Amazon’s Alexa and Apple’s Siri can understand and respond to spoken language, making them valuable tools for tasks ranging from setting reminders to answering questions.

  1. E-commerce and Entertainment

Online retailers like Amazon use AI to recommend products based on user preferences, while streaming platforms like Netflix use AI to suggest movies and shows tailored to individual tastes.

  1. Finance

AI is used for fraud detection, algorithmic trading, and risk assessment in the financial sector. It helps institutions make data-driven decisions and manage risks more effectively.

The Fuss About AI

The excitement surrounding AI is due to its transformative potential across various industries and aspects of our lives. Here are some reasons why AI is generating so much buzz:

  1. Innovation and Efficiency

AI has the power to streamline processes, automate tasks, and make predictions based on data, leading to increased efficiency and innovation in numerous fields. This can result in cost savings and improved customer experiences.

  1. Problem-Solving

AI’s ability to analyse vast amounts of data quickly enables it to tackle complex problems that would be impractical for humans to solve manually. This includes tasks in healthcare, climate modeling, and scientific research.

  1. Personalisation

AI systems can provide personalised experiences and recommendations, from personalised marketing to tailored news and content suggestions. This enhances user engagement and satisfaction.

  1. Improved Safety

In industries like transportation, healthcare, and manufacturing, AI can enhance safety by reducing human error. Self-driving cars, for example, have the potential to reduce accidents caused by human drivers.

  1. Economic Impact

AI has the potential to drive economic growth by creating new industries and jobs related to AI development, maintenance, and deployment.

Concerns and Challenges

While the potential benefits of AI are significant, there are also concerns and challenges that need to be addressed:

  1. Job Displacement

Automation and AI have the potential to disrupt traditional job markets, leading to job displacement in certain industries. This raises questions about retraining and the future of work.

  1. Bias and Fairness

AI systems can inherit biases present in their training data, leading to discriminatory outcomes in areas like hiring and criminal justice. Ensuring fairness and accountability in AI is an ongoing challenge.

  1. Privacy and Security

The vast amount of data collected by AI systems raises concerns about privacy and data security. Ensuring that personal data is protected and used responsibly is crucial.

  1. Ethical Use of AI

AI can be used for both good and harmful purposes. Ensuring ethical guidelines and regulations are in place is essential to prevent misuse and abuse. In light of the rapid and widespread development of AI, Billionaire Elon Musk was one of thousands to sign a letter published in late March by the Future of Life Institute calling for a six-month moratorium on the creation of AIs more powerful than GPT-4, the machine behind ChatGPT. Musk revealed he had fallen out with Google co-founder Larry Page last month because he said Page was not taking AI safety seriously enough and was seeking to create a “digital god”.

The Future of AI

As AI continues to advance, its role in our lives will only grow. Researchers and policymakers are working to address the challenges and ensure that AI benefits society as a whole. With the right approaches, AI has the potential to revolutionise industries, solve complex problems, and improve the quality of life for people around the world.

In conclusion, AI is a groundbreaking technology with the potential to reshape our world. It’s not just a buzzword; it’s a transformative force that is already impacting various aspects of our lives. The excitement and concern surrounding AI are both warranted, as we navigate the opportunities and challenges it presents in the coming years.

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