Markets were mixed over the course of September, with pressure from the bond market feeding through into risk assets. The Federal Reserve paused its rate hiking cycle in September, as US inflation data came in broadly in-line with market expectations, with Core CPI running at 4.3% year-on-year. Inflation has moderated so far in this hiking cycle, without weaking the labour market or consumer strength so far. However long bond yields rose over the course of the month, as markets digested more issuance from the US treasury, as well as rhetoric from central banks that interest rates will need to remain higher for longer.
The positive correlation between equity and bond markets is a worry for investors, as it is a reminder of the change in market regime seen in 2022, however in the most recent period, the scale of these drawdowns has been lower and comes at a time when growth appears to be slowing and inflation normalising.
Equity markets were mixed in September, with global indices modestly down. Both the UK and Emerging Markets were positive performers in terms of regions. However, it was our holding in the Schroder Global Sustainable Value that outperformed over the month.
Fixed income fell over the course of the month, as yields moved higher across global markets, although UK bonds were more resilient. We continue to be underweight duration and defensively positioned in fixed income and have further reduced our exposure to long duration bonds over the month.
Alternative assets, including holdings in solar power generators and UK Commercial property bounced in September, whilst still trading at attractive discounts to net asset value.
Diversifying assets added value over the month, with strategies generating strong absolute returns. A holding in the US Curve Steepener generated positive returns; this strategy goes long shorter dated fixed income and short the long end to take advantage of the normalisation of the inverted shape of the yield curve.
Equities rallied strongly, with global equities in GBP returning 2.4% over the month. Dispersion amongst regions within equities was low over the month, as most regions benefitted from the positive economic surprises from the US. The strongest returns for sterling investors were in EM, and our holding in the iShares EM SRI ETF generated positive absolute returns.
Fixed income was also positive over the course of the month, as lower than expected inflation numbers led to yields moving lower. Our holding in sterling corporate and government bonds generated positive returns over the course of the month.
Within Alternatives, holdings in a UK REIT with strong sustainable characteristics, which trade at historic discounts to NAV also benefitted from this positive inflation news, with returns of over 7%. We continue to believe this sector offers value given the discounts on offer and also the conservative approach to leverage within the sector.