September is generally known for being a tough month for equities e.g., just last year during September, the S&P 500 had its worst monthly performance since March 2020. This year is no different in terms of major indices declines during the month with S&P 500 declining by 9.2%, NASDAQ 100 down 10.5% and MXWO Index was down 9.3%. From beginning of the year to end of September, MSCI World Index and the fund are both down 25%. 2022 has been a tough year for the investors but patience is rewarded in the long-term for investors as can be seen in history. As volatile as the markets can be, stay invested to reap the benefits in the long-term

September started off on a positive note, but everything changed once U.S. inflation number were released and the UK’s chancellor, Kwasi Kwarteng proposing tax cuts for higher earners to boost growth which tipped the market over. As expected, the Federal Reserve (Fed) increased federal rate during their September meeting by 75bps with Jerome Powell warning of more ‘pain’ to come as they are willing to push the U.S. economy into recession to control inflation. The battle against inflation is causing volatility in the global markets. Other Central Banks are also following course with the European Central Bank (ECB) also increasing by 75bps. Locally, the SARB also increased rates by 75bps, and this was expected by the market. Local equities performed negatively as the ramping up of loadshedding schedule damped market sentiments.

As major economies are expected to weaken as major Central Banks increase rates; we do expect to see contraction in company earnings. Q3 earning season is important and we’re already seeing S&P 500 Q3 EPS estimates being cut lower to $55 from $60. U.S. corporate profit margins are also expected to come off as they are currently at historical highs as pricing power is expected to weaken as inventories have been increasing while consumers are feeling the pinch of higher interest rates. However, U.S. companies balance sheets have remained strong with low leverage ratios and lots of cash.

We’re in the final leg of the year and it’s been a tough ride for the equity market with increasing rates, tougher macroeconomic environment, inflation, and geopolitical tensions. Despite valuations coming off, we’re still yet to see the impacts of lower earnings revisions. Overall, the fund’s allocation to equities has been low but we’re anticipating a reversal in the Fed’s policy outlook that could result in an improvement in equity markets in the next few months. As a result, we will increase our allocation to the market but in a cautious approach.