The return on LD Discretionary, which is the largest investment fund within The Cost-of-Living Allowance Fund, stood at 5.5% on 13 October 2023. Over a 36-month period, the portfolio has delivered a positive return of 8.3 per cent. The return on the employees' holiday allowance fund stood at 5.5 per cent at the start of October 2023. Following a strong first half of the year, share prices fell in the third quarter of 2023 following interest rate rises, particularly in the US. The start of the fourth quarter has seen interest rates fall, which in turn has caused risk assets to rise.
Monetary policy drives the stock markets
Central banks’ monetary policy continues to drive the financial markets. During August and September, interest rates rose in both Europe and the US. The yield on a US government bond rose by 1 percentage point during the third quarter, from 3.8 to 4.8 per cent, which is a significant increase.
The rise in interest rates reflects the expectation that core inflation in the US remains high, despite having fallen from very high levels in 2022, and is therefore not under control. Core inflation now stands at 3.8 per cent, which is lower than the 2022 level of 5.5 per cent, but somewhat higher than the 2 per cent target. In Europe, core inflation has fallen to 4.5 per cent, but remains above the target.
Rising interest rates caused the stock markets to fall in the third quarter, as fears resurfaced that higher borrowing costs would affect both consumer spending and corporate earnings. However, share returns for the first nine months of the year remain positive. Global shares, as measured by the MSCI World Index, have yielded a return of 13.1% year-to-date in Danish kroner. Danish equities, represented by the leading OMXC25 index, have delivered a return of just over 1.0% in 2023 – buoyed in particular by Novo Nordisk.
The price of oil has also fallen slightly to $87 since its peak of $120 in spring 2022. The crisis between Israel and Hamas in the Middle East has not had a significant impact on the markets so far. The VIX index, which is an indicator of volatility in the stock markets, has also fallen to a lower level of 16.
The US labour market remains strong
The main reason why shares continue to deliver good returns is that US companies are unaffected and the US labour market is historically strong. The number of new jobs and overall employment are rising, resulting in low unemployment. This reassures US workers that it is easy to find a new job, which in turn ensures that consumer spending in the US remains high.
Leading indicators of economic activity and growth are therefore also pointing upwards in the US, which is positive for risk assets. In the eurozone, however, leading indicators are pointing downwards, with Germany in particular facing difficulties. In China, growth indicators are fluctuating between growth and stagnation, and the authorities’ attempts to stimulate growth have so far failed.
The third-quarter earnings season is about to begin, and it will be interesting to see whether companies are being affected by high interest rates, or whether they continue to meet the earnings expectations of the stock markets and analysts. The higher interest rates continue to pose a risk of a recession within the next 6–12 months, as the impact of these rate rises has not yet fully manifested itself in the real economies. In LD Pensions, there is still cause for caution.
