Following strong gains for select stocks in the first half of the year, equities and bonds declined during the third quarter while commodities were the notable outperformer. Higher energy prices as a result of oil production cuts by Saudi Arabia and Russia, supported energy stocks and resulted in the UK equity market outperforming the US and Europe, whilst leading to concerns that interest rates may remain elevated for an extended period despite signs of inflation falling. Along with investors demanding more yield to compensate them for the likelihood that returns will be eroded by inflation in future years, concern over levels of government debt have seen global bond yields move higher, meaning bond prices declined and risk assets came under pressure. Ongoing weakness in the Chinese economy and property sector issues have impacted emerging market equities more broadly.

Within fixed interest markets, high yield bonds, issued by corporations that are generally deemed less creditworthy than those with investment-grade credit ratings, have been the top performing sector this year given their shorter-dated maturity profiles and the low expectation of defaults. UK government bonds (gilts) have been the major laggard so far this year, however performance has improved recently as weaker growth resulted in investors’ adjusting their expectations for where interest rates will peak.

The US economy remained relatively robust in the third quarter, supported by a strong labour market and signs of improvement in the manufacturing sector, however data indicates that the economy is cooling. Inflation, while ticking up in August, remains on a downward trend. In the US, a further interest rate hike is expected before the end of the year with rates to remain higher than average in 2024. US equities have achieved strong gains year to date largely driven by impressive returns achieved earlier in the year by the mega cap technology stocks, however the technology sector was one of the weakest in quarter 3, along with the less influential sectors of real estate and utilities. Fears over a US government shutdown was another factor driving market sentiment during the quarter.

UK equities rose over the third quarter. Large, UK listed companies within the diversified energy and basic materials group outperformed as they rebounded from previous weakness and benefited from sterling weakness against a strong US dollar. Amid signs of improving UK consumer confidence and hopes that the Bank of England base rate may have peaked, a number of domestically focussed, mid-cap stocks recovered following poor performances earlier in the year, including housebuilders, banks, travel and property companies. The Bank of England left interest rates unchanged at 5.25% in September, following 14 consecutive interest rate hikes. There are increasing signs of some impact from tighter monetary policy on the labour market and on momentum in the economy more generally. Monetary policy is likely to remain restrictive for a sufficient period of time to return inflation to the 2% target sustainably. Further tightening would be required if there is evidence of more persistent inflationary pressures. In the Eurozone, interest rates were raised twice in the third quarter and inflation has slowed. Eurozone equities declined overall, particularly the consumer discretionary and technology sectors amid worries over the negative effects of interest rate rises on economic growth, however energy and financial stocks recorded gains.

The best performing developed equity market in local currency terms so far this year is Japan, as smaller stocks held up well and value stocks in the financials and energy sectors rallied. Returns were supported by weakening of the yen and strong domestic demand. Rising interest rates in Japan have impacted the stock prices of higher-valued growth stocks, including those in semiconductor-related sectors.

In emerging markets, concerns about the state of the property sector in China resurfaced during the quarter and weighed on sentiment. Forecasted growth rates for China and other emerging Asian economies as a whole were cut by the World Bank to the slowest pace since the 1960s other than during periods of crisis such as the COVID pandemic, the oil shock of the 1970s and the Asian financial crisis in the 1990s. China continues to struggle with retail sales below pre-pandemic levels, rising household debts and stagnant house prices. Other emerging market countries such as Vietnam, Indonesia and Malaysia are also dealing with lower exports as a result of sluggish growth and greater protectionism in the US.

While inflation has moderated, investors are now focussed on how long central banks will hold interest rates at restrictive levels in order to control stubborn inflationary pressures particularly if there are signs of it reaccelerating as a result of higher oil prices. Despite the resilience in economic activity year to date, the global economic growth outlook has deteriorated and recession risks remain elevated.


Market Performance 2023 Year to Date
FTSE All-Share +4.54%
FTSE World ex-UK +9.78%
FTSE Actuaries UK Conventional Gilts All Stocks -4.09%
FTSE Actuaries UK Index-Linked All Stocks -7.16%


  Total returns in GBP to 30/09/2023


Key Rates  
Bank of England Base Rate 5.25%
Inflation (Retail Price Index/Consumer Price Index)* 9.10%/6.70%


  *August 2023

Source of data: FE Analytics,,

The content contained in this article represents the opinions of MacIntosh & James Partners Ltd. The commentary in no way constitutes a solicitation of investment advice and should not be relied upon in making investment decisions. Past performance is not a reliable indicator of future results. The value of your investments can fall as well as rise and are not guaranteed.