September’s strong economic growth and persistent inflation pulled markets in different directions. Global equities held up for sterling investors, helped by a 2% fall in the pound against the US dollar, while government bonds weakened as yields rose.
Our position in the S&P 500 returned roughly 1.5% in sterling despite the index falling in dollar terms, contributing positively to performance over the month. UK equities declined as persistent inflation and higher borrowing costs weighed on domestically focused and rate-sensitive companies. Nevertheless, the year-to-date performance of UK markets remains near double digits. Japanese equities performed strongly, with the FTSE Japan index gaining 3.6% and contributing positively to performance over the month. Emerging markets were also strong, led by Taiwan and South Korea.
Renewed conflict involving Iran disrupted shipping through the Strait of Hormuz and lifted Brent crude by around 20% over the month to nearly $100 a barrel. Higher energy costs added to inflation pressures. The US Federal Reserve, European Central Bank and Bank of Japan raised interest rates, while the Bank of England held its rate at 3.75%. Rising yields pushed bond returns lower, detracting from performance.
Nevertheless, underweight positions in fixed income through our allocation to diversifying assets has positively contributed to performance both in September and throughout the year. Positions in AQR Managed Futures and AQR Style Premia contributed to positive performance over the month, with them rising 3.3% and 4.9% respectively.
This environment of higher rates and a stronger dollar reduced gold’s appeal, with positions in Gold Producers and Physical Gold trimming earlier gains throughout the year.
Overall, equities have absorbed higher interest rates better than bonds, although gains remain concentrated in technology stocks. Fixed-income markets came under pressure in September as yields rose; however, allocations to diversifying assets helped mitigate the impact of weaker bond returns and supported portfolio performance.
