Market Update November 2023

After a challenging October, the mood in financial markets was more positive in November. A consensus has formed that the major central banks have reached the end of the current interest rate tightening cycle, and investors have started to speculate about the timing of a first rate cut in 2024. The prospect of lower rates was supportive of equity markets, with longer duration ‘growth’ stocks leading performance for the month.

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US

Equity markets were buoyed by a cooler than expected inflation print in the US. The headline October CPI (Consumer Price Index) reading came in at 3.2% year-on-year, while the core reading slowed to 4.0%. Much of this decline can be attributed to lower energy prices, with transport costs also contributing. With the rate of inflation moving in the right direction, the probability of further interest rate increases has reduced dramatically. The question now appears to be ‘when’ not ‘if’ the Federal Reserve will cut rates. There is, however, still a risk that the market is getting ahead of itself, and the minutes from the latest Fed meeting clearly stated that they intend to keep rates elevated for an extended period of time until they are confident that inflation is well and truly under control.

Against this backdrop, government bond yields remained volatile, with the 10-year US Treasury yield falling sharply from 5% in mid-October to 4.4% by the end of November.

Looking ahead to 2024, the possibility of a US recession remains on the cards. In November, we saw a modest decline in retail spending, some weakness in manufacturing data, and a noticeable increase in jobless claims. Despite the softening economic data, the S&P 500 is now up over 21% year-to-date, while the tech-heavy NASDAQ is up 36%. While the prospect of the Fed achieving a ‘soft-landing’ should not be discounted, we believe that current US equity valuations do not reflect the risk of a more disappointing outcome.

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EUROPE

European government bond yields followed Treasuries lower, as the 10-year Bund yield declined by 20 basis points. As was the case in the US, CPI inflation data in Europe continued to cool, and headline inflation now sits at 2.4% year-on-year due to lower energy costs. The European Central Bank continues to warn about the risk of inflation, which is understandable given the strong Q3 eurozone employment data that was released during November.

European equities lagged the US, but robust performance from financial stocks pushed the MSCI Europe ex-UK index up 6.9%. European shares are now up close to 14% year-to-date, despite ongoing concerns about an economic slowdown.

In the UK, Gilt yields fell sharply, with the 10-year yield now 50bps lower than highs seen in mid-October. Meanwhile, the FTSE-All share delivered modest positive returns for the month but remains a laggard in 2023. We are watching the UK equity market closely for opportunities to allocate via high-quality active managers who are well positioned to take advantage of depressed valuations.

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ASIA

Japanese equity markets delivered another positive month, with the TOPIX up 5.4% in November. Japan is the best performing major equity index in 2024, up nearly 29% for the year. These strong monthly returns were remarkable given the backdrop of weaker than expected economic growth numbers, which adds further weight to the argument that Japanese equities are benefitting from longer-term structural tailwinds.

More broadly, Asian equity markets performed well, as Chinese stocks enjoyed a more stable month. This followed strong Chinese retail sales in October and more economic stimulus from the People’s Bank of China. The housing market continues to be an area of concern, and it remains to be seen how much further stimulus the Chinese state is willing to provide to prop up the real estate sector.

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COMMODITIES

Commodity markets were the worst performing major asset class during November. The Bloomberg Commodity Index fell 2.3% as oil prices returned to $80 despite the Israel-Hamas conflict. We also saw a sharp fall in natural gas prices, which reflects that European countries have higher than normal stores of gas going into the winter.

Towards the end of November, gold reacted positively to dovish comments from several Fed officials. The precious metal tends to perform well when real yields fall as gold pays no income to investors. Therefore, the possibility of lower rates, or indeed higher relative inflation, are both supportive of the gold price.

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OUTLOOK

As we enter the final month of 2023, it is safe to say that investors have been surprised by the resilience of the global economy this year. This strength, particularly in the US, has enabled equity markets to deliver strong positive returns across all major regions. Despite this, we remain underweight equities and have avoided highly valued US technology stocks. This has been the wrong trade in 2023, however we are actively adding equity exposure in more reasonably valued regions, where starting valuations provide a safety net if the economic picture worsens from here.

We remain positive on alternative asset classes, such as private credit, as a source of diversified and less correlated returns. This has been supportive of performance in 2023, and we will continue to allocate to high-quality boutique managers, who can deliver genuine alpha for our clients over the cycle.