What happened in September?
Global equities rose by 1% in September, bringing the total return over the past 12 months to 17%. The positive performance in September was driven primarily by a handful of large US stocks, especially technology stocks related to artificial intelligence (AI). A stronger US dollar also contributed to the positive returns.
Danish equities fell by as much as 4.6% in September, mainly due to another decline in Novo Nordisk. Nordic equities also had a poor month, with a return of -3.9%. Overall, many stock markets around the world fell in September.
Oil prices and interest rates rose further in September. This resulted in negative returns across all types of bonds, a flatter yield curve, and lower prices for precious metals such as gold and silver.
Danish short-term and long-term bonds delivered negative returns of -0.4% and -1.5%, respectively. Corporate bonds and bonds from high-yield markets also recorded negative returns of -1.5% and as much as -4%, respectively.
Why? Optimism about AI is temporarily offsetting higher inflation and interest rates
Global investor optimism, driven particularly by large investments in AI, continued in September. This strengthened earnings expectations for AI companies and temporarily offset the negative impact that substantial interest rate increases had on many AI and technology stocks.
On the other hand, substantial borrowing needs among governments and technology companies, continued global economic growth, and growing uncertainty about inflation have pushed interest rates higher. The uncertainty surrounding inflation stems, among other things, from the ongoing conflict in the Middle East.
Higher interest rates have hit bond markets hard and have also negatively affected several stocks outside the technology sector, including bank stocks and shares in companies that sell consumer goods.
High interest rates and a flattening yield curve—when short-term interest rates rise more than long-term rates—can make it more difficult for these companies to operate profitably.
Global growth continues, but several challenges lie ahead
As we enter the fourth quarter, global economic growth continues. The latest surveys of business conditions in Europe, the United States and Asia certainly point in that direction. They all indicate solid growth across several industries.
US labour market figures and reports from the global technology sector also suggest that favourable conditions for growth and profitability are likely to persist for some time.
However, there is a downside: companies are simultaneously reporting increasing price pressures. Input costs are rising, and companies expect to pass these price increases on to consumers over the coming months.
The global economy is therefore experiencing strong growth, but inflation is also increasing. As a result, several central banks are still raising interest rates to prevent inflation from becoming excessive.
Rising interest rates are also creating turbulence in financial markets because borrowing money and servicing debt are becoming more expensive. This is expected to slow economic growth over the coming quarters.
At the same time, renewed concerns have emerged about France within the eurozone. The country is struggling with a large budget deficit, rapidly rising government debt and political disagreements over how to resolve its debt problems.
In the short term—that is, over the coming weeks and months—financial markets will be paying particular attention to third-quarter earnings reports, developments in the war in Iran, trade negotiations between the EU and China, and concerns about debt levels in the eurozone.
Looking further ahead, the key question will be whether growth in AI is sustainable. This will have a major impact on whether global economic growth and the positive trend in equity markets can continue.
Several industries—not just the technology sector—are benefiting during this period from substantial investments in computer equipment, data centres and other technological infrastructure.