Delta fails to dampen equity markets

Key points

• The MSCI All Country World (global shares) Index fell 4.3% (in USD) in September, though was down a more modest 1.4% over the quarter.
• The news that one of China’s largest property developers, Evergrande, was facing imminent default caused jitters within the market, with many worried about potential contagion. Evergrande’s troubles came to the forefront following tighter restrictions on property developers’ balance sheets.
• Broader Chinese economic momentum has continued to stall with Beijing prioritising structural reforms over growth.
• Bond yields rose over the month, the New Zealand 10-year bond yield increased by 0.27% to 2.09%, while the US 10-year bond yield climbed 0.18% to 1.49%. This contributed to declines for major New Zealand and global bond indices.

Global equity markets fell sharply over the month, delivering a modest fall over the quarter. Investors reacted negatively to disruption in China’s property market, a rise in bond yields as the US Federal Reserve (Fed) looks to reduce stimulus, concern over the US debt ceiling, the impact of shortages (supply chain disruptions and energy) and ongoing COVID delta disruption. With the US Fed confirming a tapering path, higher bond yields triggered a rotation from growth to cyclical stocks. This saw the MSCI All Country World Value sub-index outperform its growth counterpart by 2% over the month. For context, the value index outperformed by 5% when we saw a sharp increase in yields in March this year.

Despite the current mobility restrictions, New Zealand remains different to many other countries with very little spare capacity and broad-based inflation pressures. The NZIER Quarterly Survey of Business Opinion (QSBO) showed capacity utilisation increased to all-time highs in Q3. Beneficiary numbers suggest the unemployment rate remains close to 4% and data soon to be released is likely to show annual inflation increased to 4% in Q3 – double the midpoint of the Reserve Bank of New Zealand’s (RBNZ) target range. This strong economic momentum has seen the market price in an official cash rate (OCR) of 1.5% in February 2023, a faster tightening cycle than many other developed economies.