MARKET COMMENTARY – NOVEMBER 2022

Developed market equities rebounded in October, reversing some of the losses that have dominated for the year to date. Sentiment improved and expectations for the US Federal Reserve Bank (Fed) to move towards a less aggressive tightening regime in the coming months was encouraging for markets. The easing of global supply chain constraints and the steps taken by European governments to lessen the impact of the energy crisis and mitigate the risks of a deep recession provided further support. Elevated geopolitical tensions and a challenging global economic outlook remain the key risk areas.

US equities led the October rally and commodities have risen recently despite the continued uncertain outlook and the concerns over the Chinese economy. Emerging market equities saw further losses and were the worst performing asset class in October, with China continuing to be the weakest market along with the impact of a strong US dollar. Bond yields continued to rise before falling back slightly at the end of October, and UK government bonds (gilts) delivered the strongest gains within the government bond sector.

While markets are wanting to see positive developments in terms of a dovish message from central banks, high inflation combined with strong labour markets have continued to support a tighter monetary policy approach. UK and US interest rates are now at their highest level since 2008. As expected, the US Fed raised rates by 0.75% on 2 November, taking the lending rate range to 3.75% – 4%. In the UK, the Bank of England (BoE) is contending with the more immediate threat of a recession, as well as financial instability risks, however interest rates were increased by 0.75% on 3 November as expected. The BoE expects UK inflation to remain elevated at over 10% in the near term before falling by mid-2023 and declining to the 2% target in two to three years, financial markets have continued to reflect expectations of a higher peak in interest rates. Despite the ongoing energy crisis and recession in Europe, the European Central Bank (ECB) delivered a 0.75% interest rate hike in October.

The US economy has shown some signs of slowing, notably the housing and manufacturing sectors. Over half of the companies in the S&P 500 Index have reported earnings, most of which were positive earnings surprises contributing to October’s equity market gains.

The Amazon share price fell nearly 20% after an earnings warning, however, this did not derail the positive sentiment which controlled equity markets in October. For the year to date, the more traditional sectors of the market such as energy, industrial and health care stocks have outperformed technology stocks.  Despite a worsening economic outlook, the UK FTSE 100 Index has been resilient compared to other developed equity markets so far this year, where the bias towards banks and energy companies has benefitted performance, and sterling weakness against the US dollar has also contributed to the returns achieved.

Rishi Sunak was appointed as the new UK Prime Minister in October, making Liz Truss the shortest-serving Prime Minister. The new Chancellor, Jeremy Hunt, reversed many of the previous Chancellor’s tax cuts and promised to deliver a more restrained budget in November. As a result, UK government bonds (gilts) and sterling rallied from the post mini-budget lows.

In Europe, the energy crisis remains the key risk to growth, yet there were encouraging signs that a harsh recession may be avoided given the fiscal support provided along with government’s plans to tackle the energy crisis which should help both households and businesses. Gas prices continued to move lower as storage tanks remain full and autumn was warmer than usual, however prices remain higher than their 2021 average.

In contrast to other central banks, the Bank of Japan continues to pursue its unchanged accommodative policy as inflation remains subdued and a stronger services sector reflects the ongoing economic reopening following the COVID-19 pandemic. The People’s Bank of China are pursuing a more accommodative monetary policy with interest rate cuts expected next year as inflation remains low. Although the Chinese manufacturing sector remains strong, the services sector is still suffering as a result of the sporadic lockdowns. At China’s 20th Party Congress, President Xi was reappointed as expected and along with other party changes, equity markets were volatile and internet companies were hit the hardest.

The economic outlook may deteriorate further, however there are factors that may help to mitigate the depth of any downturn including, in the US, a strong labour market, improved housing market fundamentals with banks better positioned, therefore the risks are lower compared to the problems that led to the global financial crisis. In addition, government support measures in Europe should reduce the threats to disposable income posed by high energy bills.

Inflationary pressures and recessionary fears remain at the forefront of investors’ minds and markets are likely to remain volatile in the short term as a result. The decline in equity markets this year suggests that a significant amount of bad news has already been priced in and bond markets have adjusted sharply to the new environment resulting in surprisingly steep declines in values but considerably more attractive yields for investors. Despite the challenging economic backdrop and stagflationary environment creating difficult conditions, areas of resilience in equity markets may include higher dividend paying companies who may be reluctant to cut their dividends even in the face of falling earnings.

Total returns in GBP to 31/10/2022

* September 2022

Source of data: FE Analytics, www.bankofengland.co.uk, www.ons.gov.uk

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.