Wake me up when September ends
Wake me up when September ends
Summary
US interest rates were reduced on the 17th of September, and more reductions are on the way. Whilst the US economy is slowing, it retains forward momentum. The fiscal plans enacted by President Trump are likely to support economic growth over the next year or so, even if the outcome is higher government debt.
A key support to the increase in global equities is the rising money supply, i.e. liquidity. Global asset prices have risen on the back of this liquidity resulting in elevated valuations. But with falling interest rates and rising earnings, asset prices may continue to climb.
Emerging markets have enjoyed a strong period of returns in 2025. Supported not just by the global backdrop of increased liquidity, but also through self-help in terms of improving corporate governance and equity market listing requirements. This is seen as raising the profitability and quality of companies that remain listed in the likes of China and South Korea. Against the backdrop of political confusion in Europe and the UK, emerging markets appears to be a relative bastion of stability.
Both policy levers set to support the US economy
Interest rates were cut in the US by 0.25% on the 17th September. This move was much anticipated, and more rate cuts are expected in coming months as US economic data has been weaker of late. One notable data point that reflects a weak economy has been the US labour market report. Not only have recent months shown limited jobs growth, but previous numbers have been revised down indicating that the pace of job creation over the past few years was much weaker than previously reported.
This slowdown in the US labour market is reflective of weakness in cyclical parts of the US economy, such as housing, where house building remains at low levels. It is perhaps odd that actual house prices haven’t adjusted to the weaker backdrop, yet.
It is expected that the Federal Reserve will continue to reduce interest rates through the rest of 2025 and into 2026. It remains unclear whether this will translate into a recovery in the US housing market, as interest rates for mortgages are typically related to the yield on longer dated bonds, unlike in the UK where borrowers typically borrow for up to five years. But at the margin, lower interest rates are likely to be more helpful than high interest rates for cyclical parts of the US economy.
US interest rates have been cut this week, after a long pause and the market expects more to come
Source: Bloomberg, Artorius
Central bank…. The cheque’s in the market?
Interest rate cuts signal that around the world central banks are adding liquidity back into the economy. Bloomberg’s central bank liquidity measure continues to climb and has risen by 6.5% over the past year. This is a recovery from a period of stagnation between mid-2022 and mid-2024. Rising liquidity floats all boats, and is likely to be a continued source of buoyancy for markets.
Central bank liquidity has started to climb in recent months after a period of stagnation between 2022 and 2024. Periods of rising liquidity have typically proved supportive for global equity prices.
Source: Bloomberg, Artorius
Emerging from the shadows
Emerging market equities have delivered robust returns in 2025 and are once again a source of investor interest after a decade marked by political and economic challenges. Recent policy uncertainty under President Trump has rekindled interest in regions beyond the US, as investors reassess global opportunities amid faltering US exceptionalism. Some countries are benefitting from currency shifts and corporate governance reforms, presenting compelling options for those seeking diversification away from US-centric investments.
The last decade has seen emerging markets contend with political upheavals, regulatory complexities, trade dependencies and currency fluctuations. At the same time, the period of ‘US exceptionalism’ – defined by the US’s superior economic growth and equity market outperformance relative to other regions – has captivated investors, resulting in a pronounced tilt towards the US in allocations.
However, turbulence spurred by policy uncertainty under US President Donald Trump has prompted a renewed sense of optimism about regions outside the US.
Amid low valuations and a weaker US dollar, investor interest in Asia and emerging markets has surged. Following the spike in volatility triggered by April’s Liberation Day tariff storm, emerging markets found a new sense of calm and have now rallied beyond pre-Liberation Day levels. In a marked departure from the trends of the previous decade, the MSCI Emerging Markets Index posted a robust 15.6% return for the first half of 2025, significantly outperforming the S&P 500's 6.2% gain (in US dollars).
The gains since the start of 2024 have been predicated on both better earnings per share, lower interest rates and governments taking steps to improve the backdrop for equity investors. The latter will hopefully translate into a sustained improvement in the profitability of listed companies.
Emerging market equities have benefitted from the improvement in the profitability backdrop
Source: Bloomberg, Artorius
China: changing the rules
China, the dominant emerging market economy, is confronting a challenging macroeconomic landscape, shaped by the fallout from tariff wars and fiscal policy adjustments. Despite these pressures, Beijing’s economic strategies remain crucial in influencing emerging markets equities, particularly amid shifting global trade dynamics.
In response to revised 2025 budget deficit forecasts, China has expanded its deficits and issued special bonds to address export challenges and bolster domestic stability amid high savings rates and fluctuating housing markets. Central to these reforms is a corporate governance overhaul, drawing parallels with Japan’s initiatives from 2022, that focused improving corporate capital allocation and alignment with international norms to boost investor confidence.
Mirroring the Tokyo Stock Exchange restructuring in 2022, which aimed to improve firms’ return-on-equity, Beijing’s policies are refining corporate evaluations of state-owned enterprises based on profitability and shareholder returns. An acceleration in dividend distributions and share buybacks reflects a clear transition, enhancing investor confidence through disciplined financial management.
It appears that the Chinese authorities are seeking alignment with global profitability and governance standards for companies that are listed. Whilst political tensions between China and the US remain, the corporate sector appears to be moving to become more investable for shareholders. Similar steps are being taken in South Korea. Maybe policy stability could be an emerging market strength compared to the slightly fraught environment in the US and across much of Europe, where political risk is elevated.
When government deficits are compared across the same developed economies, the likes of the UK, France and the US stand out with deficits running at over 5% of GDP in 2024. Forecasts from the IMF do suggest that the deficit in the UK is set to fall by more than in other economies.
Our previous research shows that countries with falling and low government deficits tend to have lower economic growth rates. This should in turn be met with lower interest rates, but in the UK inflation still remains at levels that the Bank of England believe need elevated interest rates. However, one policy lever that may be pulled in coming months is that the Bank of England may end the selling off of UK government bonds (gilts), also known as Quantitative Tightening. Over recent years the Bank of England has sought to shrink its balance sheet by selling gilts into a market already saturated by the significant issuance needed to fund the high fiscal deficit. This may explain why gilt yields are much higher than in other economies despite the UK having similar or even better debt dynamics. If the Bank ends the gilt sales, bond yields may well ease lower, which would ease the need for economically harmful austerity in the November Budget.
Fiscal fix
Closer to home, both in the UK and Europe, there appears to be a realisation that the current fiscal framework is severely challenged. Higher bond yields are forcing governments into a challenging fiscal space.
European budget debt levels are high, apart from in Germany, where debt levels remain low. Across much of the developed economies, government debt levels exceed the size of the economy as measured by Gross Domestic Product (GDP), according to data from the International Monetary Fund (IMF). On this measure the UK doesn’t appear to be too bad, being in the middle of the pack albeit the government bond yield is higher than the other economies.
Developed economies: Government debt levels as a percentage of GDP and government 10 year bond yields
Source: International Monetary Fund, IMF Fiscal Monitor April 2025, Global Debt Database - Central Government Debt, Bloomberg, Artorius
Developed economies: Government deficits levels as a percentage of GDP in 2024 and 2027 (IMF forecast)
Source: International Monetary Fund, IMF Fiscal Monitor April 2025, Fiscal Monitor (April 2025) - Net lending/borrowing (also referred as overall balance), IMF, Artorius
Conclusion
US interest rates were reduced on the 17th of September, and more reductions are on the way. Whilst the US economy is slowing, it retains forward momentum. The fiscal plans enacted by President Trump are likely to support economic growth over the next year or so, even if the outcome is higher government debt.
A key support to the increase in global equities is the rising money supply, i.e. liquidity. Global asset prices have risen on the back of this liquidity resulting in elevated valuations. But with falling interest rates and rising earnings, asset prices may continue to climb.
Emerging markets have enjoyed a strong period of returns in 2025. Supported not just by the global backdrop of increased liquidity, but also through self-help in terms of improving corporate governance and equity market listing requirements. This is seen as raising the profitability and quality of companies that remain listed in the likes of China and South Korea. Against the backdrop of political confusion in Europe and the UK, emerging markets appears to be a relative bastion of stability.
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