Market Update October 2023

The market narrative in October was dominated by rising government bond yields and the Israel-Hamas conflict. The resultant weakness in both equities and bonds was a timely reminder for investors of the value of alternative assets that provide crucial diversification during times of market stress.

Commodities was the best performing major asset class, as oil and gold both rallied in response to heightened geopolitical uncertainty.

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US

The US economy continued to prove more resilient that many forecasters had predicted. Third quarter GDP came in at 4.9% annualised, which was well ahead of expectations. This, combined with a strong jobs report, higher-than-anticipated inflation, and buoyant retail sales, combined to shift interest rate expectations higher. The prospect of a sustained period of elevated interest rates, and concerns about the Israel-Hamas conflict, weighed on equity returns for the month. The S&P500 fell 2.1% and is now up 10.7% year-to-date. Within this, growth stocks were more resilient than value stocks, as investors continue to attach a premium to companies that are perceived as beneficiaries of Artificial Intelligence. Despite the negative returns, the S&P500 was the top performing major equity market in October.

Turning to government bonds, the US 10-year Treasury yield breached 5% for the first time since the Great Financial Crisis. This was driven by the strength of the US economy and ongoing concerns around the fiscal outlook. Sentiment towards the US was not helped by weeks of infighting within the Republican party as they tried to elect a new Speaker of the House of Representatives. Ultimately, Mike Johnson, a close ally of Donald Trump, was elected, which signalled a sharp tack to the right for the Republicans.

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EUROPE

In the UK, the FTSE All-Share fell 4.1% in October, despite its heavy weighting towards oil & gas stocks that have benefitted from rising commodity prices. Gilts remain a significant laggard this year and fell a further 0.4% this month.

In UK politics, the Labour Party delivered two spectacular by-election wins, which have prompted comparisons with the run-up to Tony Blair’s general election victory in 1997. These results occurred against the backdrop of more disappointing economic data, with consumer confidence dropping precipitously. Despite slowing growth, the UK is still suffering from sticky inflation, which suggests that the pain of higher interest rates will persist for the foreseeable future.

European equities declined 3.3%, on the back of a series of worrying economic data releases, including a sharp fall in the eurozone purchasing managers’ index. At the same time, eurozone inflation fell to 2.9% in October, its lowest level for more than two years, bolstering expectations that the European Central Bank will not raise interest rates further. This reading represented the region’s slowest annual growth in consumer prices since July 2021.

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ASIA

Japanese government bonds fell during October, as investors speculated about the prospects of the Bank of Japan loosening its yield curve control (YCC) policy. At the October meeting, the BoJ did tweak the YCC policy, and reframed the 1% upper limit on 10-year government bond yields as only a “reference”. There is growing evidence that corporate governance reforms in Japan are starting to materialise. For example, the share of Japanese companies with two or more independent directors has climbed from 22 per cent in 2014 to 99 per cent in 2023.

Asian and Emerging Market equity indices were weak in October. Much of this can be attributed to the threat of a Chinese economic slowdown. Chinese manufacturing unexpectedly contracted in October, adding more pressure for further fiscal stimulus from the Chinese government. Policymakers have gradually eased monetary conditions, marginally cutting benchmark lending rates and relaxing some constraints on housing purchases.

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COMMODITIES

The tragic events in the Middle East have resulted in oil prices moving higher, as markets priced in the risk of the conflict escalating which could disrupt the supply of oil. At the same time, we have seen a sharp increase in oil & gas M&A activity, with Chevron’s $53bn takeover of Hess and ExxonMobil’s $60bn acquisition of Pioneer. Analysts now expect these megadeals to spark further industry consolidation.

Investors responded to the Israel-Hamas conflict by purchasing gold, which is viewed as a safe haven during times of geopolitical and market uncertainty. The gold price has received additional support from record levels of central bank buying, as countries such as China and Russia look to reduce their reliance on the US dollar.

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OUTLOOK

As we discussed in our recent Q3 outlook, the rise in bond yields has made fixed income look more attractive as a source of yield and protection, however, we continue to favour shorter duration bonds and private credit. We retain exposure to alternatives, which should provide a valuable source of diversification if the positive correlation between stocks and bonds persists. The possibility of a US recession in 2024 remains live, and we continue to feel that stretched US equity valuations fail to reflect the level of risk we face.