Market commentary: Oct 2023

Performance summary

Led by the US, markets are increasingly factoring in higher-for-longer interest rates. This is a negative force as it reduces company valuations (particularly property), and, when the cost of money goes up, companies and individuals spend less. Share prices have fallen creating unrealised losses and reducing the overall return in our client portfolios. Investors are eagerly looking for signs that interest rates have peaked and will start to fall. When this happens, we will see upward movement in valuations and the mood of the market change to positive. In the meantime, as long-term investors we stay invested – the market cycle will turn!

How China v. The West tensions are shaping global markets

Tensions between China and Western countries are rising, with tit-for-tat trade tariffs, tech rivalry, and spying allegations. The ramifications for global markets and supply chains are significant. Here are 4 trends that our fund managers are watching closely:

• Inflation. Multinational companies in strategic sectors are diversifying production away from China. For example, the US is bringing the manufacture of electric vehicles and semiconductors back home, Taiwan Semiconductor Manufacturing Company (the world’s largest chip maker) is moving production to Germany and the US. Actions like these could have inflationary repercussions as the move away from globalisation of trade makes production less efficient and increases the cost of production.

• Friendshoring. Friendshoring is the idea of replacing China’s role in the supply chain with “friendly nations”. Countries like Mexico and Vietnam are major beneficiaries of the US changing their supply chains. Mongolia is seeking US investment in mining of rare earth metals used in high-tech products like cell phones. The Philippines is courting the US for infrastructure investment.

• Rush to India. India is viewed as the most able country to compete with China on low-cost, large-scale manufacturing. It’s large and young population, and a burgeoning middle class, creates opportunities for multinationals when compared to China. India’s central bank forecasts their economy will expand 6.5% this year, while China is expected to grow around 5%.

• Trade protectionism. Chinese electric vehicle (EV) manufacturers will take a hit if the EU imposes punitive tariffs on EV imports. Meanwhile, the US government is subsidising domestic semiconducting manufacturing. This is great for Intel Corporation but exposes the company to Chinese retaliation. There are reports that China may ban government workers from using iPhones, and Chinese banks have told staff not to wear European luxury items at work.

These trends raise questions about deglobalisation and the threat to free trade. What direction will this take? Will it be inflationary? Is India the next China? What impact will it have on small, open economies (like NZ) that benefit most from free international trade? Will the US’s geographical, demographic, and military advantages mean they will dominate? Who does NZ side with?

Richard Grimes, CERTIFIED FINANCIAL PLANNER (CFP^CM), Director and Financial Adviser