The digest
Global equity markets continued their recent slump as familiar themes of weak Chinese data and rising bond yields weighed on sentiment. In China, fresh concerns about the property sector surfaced after Country Garden Holdings, China’s largest property developer by sales, suspended trading of some of its bonds. This spooked investors, and weak Chinese retail sales and industrial output data added to the gloom. In Europe and the United States, market newsflow was quieter, with earnings season largely behind us and trading volumes low due to the summer holiday season.
Inflation concerns remained a theme, with UK wage growth stronger than expected and July Consumer Price Index (CPI) data falling, but still “sticky”.
The MSCI World Index had its worst weekly performance since March, down 2.5% last week, whilst the S&P 500 Index was down 2.1% and the STOXX Europe 600 Index was down 2.3% and the MSCI Asia Pacific Index was down 3.6%.1
Week in review
Europe
Last week was another disappointing one for European equities, as the STOXX Europe 600 Index saw its third consecutive weekly decline amidst rising interest rates, worsening Chinese economic data and low late-summer liquidity. European growth heavyweight Adyen also impacted investor sentiment after reporting its slowest revenue growth on record.
Overall, growth stocks underperformed, while value and defensives continued to outperform versus cyclicals for a second week in a row.
Real estate continued to struggle last week and could see another poor showing as UK’s Rightmove index, which tracks the cost of homes coming to market, fell 1.9% to £364,895 ($465,620) in August.2 It was the biggest decline for August since 2018 and the sharpest drop since the end of last year.
European equity funds saw another weekly outflow of US$1.3 billion, marking 23 weeks in a row of outflows.3
It’s worth noting that August-September mark an historically weak time of the year for equities in both Europe and the United States, a trend which looks so far to be playing out again this year.
UK macro data last week was interesting. There were mixed messages from the July employment data, with stronger-than-expected weekly earnings (+7.8%), but a slightly higher unemployment rate at 4.2%. UK July CPI came in slightly hotter than expected at 6.8%, though lower than the Bank of England’s (BoE’s) expectations. Core inflation remains sticky—unchanged at 6.9%. The market currently sees the BoE rate peaking at 6%, up from the current rate of 5.25%.4
The latest BofA Fund Managers’ Survey revealed that UK equity-focused funds saw US$20 billion in outflows year to date, but sentiment is now starting to show signs of improvement.5
United States
US equities finished broadly lower last week, with markets still in the summer doldrums. The S&P 500 Index finished down 2.1%, whilst the Dow Jones Industrial Average and Nasdaq Index were each down 2.2%. The S&P 500 Index has now fallen 5.25% from its July highs, the largest retracement since February/March. A series of factors continue to weigh on investors’ risk appetite, such as rising rates, uncertainty around the conclusion of Federal Reserve (Fed) tightening, and doubts on the sustainability of disinflation.
All US equity market sectors finished lower on the week, but technology outperformed, given recent oversold conditions. Consumer discretionary stocks were particularly weak last week, with the underperformance seemingly tied to a rotation out of some of the year-to-date winners. Real estate investment trusts remained weak as sentiment remains firmly negative around the rate-sensitive global real estate sector.
Rising interest rates continue to be a concern for equity investors, as the US 10-year Treasury yield hit 4.33% last week, its highest level since 2007. The rise was partly attributed to improving data, reinforcing fears that rates will remain “higher for longer”.
The third quarter Atlanta Fed GDPNOW reading was revised upwards last week to 5.8% vs. 5.0% in the previous week amidst stronger-than-expected retail sales numbers and upward revisions for June. July retail sales jumped to +0.7% vs. +0.3% previously.
The prices paid components of the August Fed data saw notable upticks last week too, with the Empire prices paid at 25.2 vs. 16.7 in June, whilst the Philadelphia Fed survey also showed a significant increase in prices paid, 20.8 vs. 9.5 previous.
The Federal Open Market Committee July meeting minutes highlighted the two-sided risks, stating that “most participants continued to see significant upside risks to inflation, which could require further tightening” but also noted that they “no longer judged that the economy would enter a mild recession”.6 The market continues to expect the Fed to raise interest rates another 25 basis points (bps) before the end of the year.
The CNN Fear and Greed Index has fallen sharply over the summer, reflecting the slump investor sentiment. It has fallen from “Greed” to “Neutral” in the past week, hovering just above “Fear” territory.7
Asia Pacific
Last week equities in Asia weakened, with the MSCI Asia Pacific Index trading down 3.65%. Hong Kong’s equity market was the worst performer with a decline of 5.89%.
The main focus was the weaker data out of China and concerns around the real estate space, with several of the largest property companies missing interest payments.
China
The Shanghai Composite Index declined 1.8% last week, and China’s currency came under pressure amidst weaker economic data and real estate sector worries. The Peoples Bank of China cut rates on one-year loans by 15 bps to 2.5% to bolster the economy, but many market observers saw the move as too little, too late.
On the data front, July data missed market expectations across the board, of note:
- July retail sales +2.5%
- Industrial output +3.7%
- January-July Fixed investment +3.4%
- July new home prices -2.5%
Some investment banks cut their forecasts for Chinese economic growth, suggesting the situation may be even worse than is being reported. In addition, the government announced it will pause publishing data on the youth unemployment rate until “surveying methods have been improved”. The June reading was 21.3%.
In addition, there are reports that some real estate companies have been defaulting on interest payments. Country Garden suspended trading in a number of its onshore bonds, and if Country Garden goes into default, it may hit the sector even harder than Evergrande’s collapse, considering Country Garden’s project size. Markets have been hoping for a significant rescue package from the government, but so far the markets have been disappointed.
Finally, ratings agency Fitch announced it may reconsider China’s A+ rating if bank and corporate debt become “real liabilities for the government”.
Hong Kong
Stocks in Hong Kong traded lower for the third consecutive week amidst China’s property-sector woes and fresh data that pointed to a weak economy. Even Beijing’s unexpected key policy rate cut failed to stem the bearish sentiment.
Auto stocks weakened after Tesla cut prices twice within a week; meanwhile, at least 10 brands in China cut prices since August, reigniting concerns of a price war.
As discussed, Chinese real estate developers plunged on default concerns.
Japan
The Nikkei dropped 3.15% last week, as US Treasury yields remained at elevated levels and the selloff in stocks on mainland China and Hong Kong continued.
The yen continued to weaken against other currencies last week. The US dollar reached a nine-month-high against the yen at mid-146 on Thursday but closed the week slightly off that peak.
Week ahead
This week, the Fed’s annual central banker conference at Jackson Hole, Wyoming (Thursday/Friday) should capture investor attention, along with earnings from tech giant Nvidia (Wednesday after the market close). With little Chinese macro data scheduled this week, the market should get some respite there.
Monday 21 August
- United Kingdom: Rightmove House Prices (August), CBI Total Dist./Retailing Reported Sales (August)
- Germany: Producer Prince Index (July)
Tuesday 22 August
- United Kingdom: Public Finances (PSNCR)/ Central Government NCR (July), Public Sector Net Borrowing (July), PSNB ex Banking Groups (July)
- Euro area: EMU: European Central Bank Current Account SA (June); ITA: Current Account Balance (June)
- United States: Philadelphia Fed Non-Manufacturing Activity (August), Existing Home Sales (July), Richmond Fed Manufacturing Index/Business Conditions (August)
Wednesday 23 August
- United Kingdom: S&P Global/CIPS UK Manufacturing/Services/Composite Purchasing Managers Index (PMI) (August)
- Euro area: EMU: HCOB Eurozone Manufacturing/Composite/Services PMI (August), Consumer Confidence (August); FRA: HCOB France Composite/Manufacturing/Services PMI (August); GER: HCOB Germany Manufacturing/Service/Composite PMI (August)
- United States: MBA Mortgage Applications (August), S&P Global US Manufacturing/Services/Composite PMI (August), New Home Sales (July)
Thursday 24 August
- France: Business/Manufacturing Confidence (August), Own-Company/Production Outlook Indicator (August); Germany: Import Price Index (July)
- United States: Chicago Fed Nat Activity Index (July), Durable Goods Orders/Ex Transportation (July), Cap Goods Orders/Ship Nondef Ex Air (July), Initial Jobless/Continuing Claims (August), Kansas City Fed Manufacturing Activity (August)
Friday 25 August
- Germany: Private Consumption/Government Spending/Capital Investment (second quarter), Gross domestic product SA/NSA/WDA (second quarter), IFO Business Climate/Current Assessment/Expectations (August)
- United States: University of Michigan Sentiment/Current Conditions/Expectation/1-Yr/5-10 Yr Inflation (August), Kansas City Fed Services Activity (August)
Views you can use
Quick Thoughts: Don’t miss the return opportunity in fixed income
Given the current economic backdrop, where can investment opportunities be found, particularly within the fixed income asset class? Head of Franklin Templeton Institute Stephen Dover shares his key takeaways from a panel discussion that he moderated with fixed income experts within the company. Read more.
Three value equity themes for the end of 2023
Christian Correa, Chief Investment Officer of Franklin Mutual Series, discusses his team’s top three themes for the back half of 2023: a less-gloomy US macroeconomic outlook, real asset investment and Japan’s rising sun. Read more.
Meet the Manager: Sandy Kaul
Franklin Templeton’s Head of Digital Asset & Investor Advisory Services Sandy Kaul has a wealth of experience in the financial industry and a vision for the future in the digital asset space. She finds the trend toward democratizing new investment frontiers exciting. Learn more about Sandy in this Q&A. Read more.
PODCAST Anatomy of a Recession update: Cracks in the foundation
Perspective on the most recent US economic data, the investor’s view, and how reviewing previous recessionary periods may help us today, in this conversation with Jeff Schulze, Head of Economic and Market Research at ClearBridge Investments. Read more.
Emerging Markets Insights: Fund flows improving
Uncertainty toward emerging market economies is waning, as countries are focusing on growth strategies and policies to spur their respective economies. Franklin Templeton Emerging Markets Equity explores the investment implications. Read more.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, trading practices, availability of information, limited markets and currency exchange rate fluctuations and policies; investments in emerging markets involve heightened risks related to the same factors. Sovereign debt securities are subject to various risks in addition to those relating to debt securities and foreign securities generally, including, but not limited to, the risk that a governmental entity may be unwilling or unable to pay interest and repay principal on its sovereign debt. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments.
China may be subject to considerable degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political and economic risks.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.
Past performance is not an indicator or guarantee of future performance. There is no assurance that any estimate, forecast or projection will be realised.
Links to External Sites
Franklin Templeton is not responsible for the content of external websites.
The inclusion of a link to an external website should not be understood to be an endorsement of that website or the site’s owners (or their products/services).
Links can take you to third-party sites/media with information and services not reviewed or endorsed by us. We urge you to review the privacy, security, terms of use, and other policies of each site you visit as we have no control over, and assume no responsibility or liability for them.
IMPORTANT LEGAL INFORMATION
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realised. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.
Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
_______
1. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
2. Source: Rightmove House Price Index. August 2023. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
3. Source: EPFR, “Cashing in and going on holiday.” 21 August 2023.
4. Source: Bloomberg World Interest Rate Probability. Pricing as of 21 August 2023. There is no assurance any estimate, forecast or projection will be realised.
5. Source: BofA European Fund Manager Survey, BofA Global Research.
6. Source: Reuters, “Fed officials divided in July over need for more rate hikes, minutes show.” 16 August 2023.
7. CNN’s Fear & Greed Index tracks seven indicators of investor sentiment. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.