After a prolonged rally during the middle stretch of the year, global markets hit the brakes hard in August, as old concerns about inflation and higher interest rates resurfaced. The MSCI World Islamic Index fell by 2.2% in August, while the Dow Jones Sukuk Index fell 0.2%.
The big story in August was the troubles in the Chinese economy. Since China reopened its economy after a prolonged pandemic lockdown, many were expecting a strong rebound in 2023. That has not been the case, as weak consumer demand combined with production declines and a faltering real estate market has put immense pressure on over-leveraged businesses and the overall health of the country’s financial system.
As a number of large Chinese developers, such as Country Garden, warned that they may not be able to meet their debt payments, market participants were concerned that there may be more trouble lurking, with the tight government control on information making the Chinese economy difficult to get a read on even in the best of times.
As China is still one of the largest global trade partners, the repercussions of China’s domestic issues were felt across developed and emerging markets. Markets had not been expecting problems in China, and as a result the China-related risks had to be taken into account in equity and credit markets.
The trouble coming out of China also dampened the optimism around artificial intelligence, as strong earnings results by tech leaders such as Nvidia were not enough to prevent a dampening of market sentiment.
Meanwhile, in the US, the Federal Reserve announced at the annual Jackson Hole conference that they were prepared to continue hiking interest rates as they were not convinced that inflation has subsided. Strong economic data in the US along with weaker data internationally resulted in the US dollar appreciating during the month.
Markets recovered some of their losses towards the end of the month, with a sense of calm being restored by the Federal Reserve comments along with the observation that real (inflation-adjusted) yields were once again becoming positive.
Heading into September, it is likely that there will be continued volatility as markets continue to reevaluate the risks of holding equities at current valuations. Given that the year to date performance has been very strong, a pull back is to be expected. To a certain extent this volatility is seasonal.
Despite these risks, however, markets are still positive in their economic outlook, as recession fears have abated and have been replaced by the fear of missing out on gains. Any volatility during September and fall months may be seen as a buying opportunity with the expectation of long term growth.