Market Overview

Summary of world markets in November

Bond and equity markets delivered strong returns in November. Sentiment towards risk assets was buoyed by signs that inflation rates around the world may be topping and the pace of interest rate rises slowing. Indications that Beijing was moving away from its zero-tolerance approach towards COVID-19 also cheered investors.

Chancellor Hunt delivered his Autumn Statement, presenting a picture of an economy weighed down by weak growth, rising taxes and increased borrowing.  There were discussions about how the country should improve its relationship with the EU, as it was acknowledged that the friction resulting from post-Brexit arrangements was exacerbating the UK’s economic difficulties.  A “winter of discontent” beckoned as a variety of strikes were announced.  Judges at the Supreme Court ruled that a second Scottish independence referendum requires the UK government’s consent.

The Bank of England projected that GDP would continue to fall throughout 2023 and beyond as high energy prices and materially tighter financial conditions weigh on spending.  The Bank also forecasted that inflation will start to fall back from early next year, before dropping sharply to some way below the 2% target in two years’ time.  This sobering view was backed up by the latest data showing that the economy shrank between July and September.  UK retail sales fell, and the quarterly CBI survey revealed a high degree of pessimism about the future.  In the wake of the calamitous Truss/Kwarteng budget, data revealed a collapse in housing demand in response to rocketing mortgage rates.  The inflation rate hit 11.1%, the highest since 1991, with price rises broadly based.  The OBR forecasted a severe cost-of-living squeeze as wages fail to keep up with rising prices.

Inflation-wise, the big news was the US CPI reading, which – to the delight of bond and equity markets – came in lower than expected.  This led investors to pare back their interest rate expectations, with a 0.50% rise now expected in December, rather than 0.75%, as had been feared.  The consensus view of the US amongst economists turned towards the idea that any recession would be “short and shallow”.  Euro Area CPI also fell back by more than expected, although remains elevated at 10%.  Labour market data continued to reflect tight employment conditions across many economies.  China’s economic health continued to reflect the difficulties of the COVID-19 lockdown measures.

the Global Financial Crisis. 57% of warnings cited rising cost pressures, while 23% quoted labour market problems. Profit warnings were particularly concentrated amongst consumer-related sectors with 11 in the Retailers sector, nine in Travel & Leisure, and seven in Food Producers.

The US Federal Reserve delivered another chunky 0.75% rise in interest rates, its sixth consecutive hike.  The target range of 3.75% – 4.00% is now the highest since 2008.  More positively for markets, later in the month, Jerome Powell said that “the time for moderating the pace of rate increases may come as soon as the December meeting”.  Following suit, the Bank of England also raised by 0.75%, taking the base rate to 3.00%. Policymakers voiced concerns about stubbornly high inflation, which rose back to a 40-year high in September, amid a weakening economic outlook.

The Democrats retained control of the Senate in the US mid-term elections, while the Republicans took control of the House of Representatives.  In Ukraine, Russia targeted power stations and residential buildings, plunging large parts of the country into darkness.  The world held its breath as a missile landed in Poland, later identified as a stray Ukrainian air defence weapon, deployed to counter the Russian bombardment. In China, demonstrations broke out in Beijing, Shanghai and other cities in protest against the government’s zero-tolerance approach to COVID-19.  This represented one of the greatest challenges thus far to President Xi Jinping’s authority. Thereafter, some rules were relaxed as Omicron was described as less “pathogenic”.  Benjamin Netanyahu won the Israeli election, becoming the longest serving leader in the country’s history.

Equity markets were in an ebullient mood, and strong returns were delivered by most markets. The beleaguered Chinese stockmarket received a shot in the arm as authorities began to ease the stringent COVID-19 policies.  This saw emerging market indices topping the leader board. Style-wise, there was not much to choose between growth and value indices.  At the sector level, the outperforming sectors included a mix of economically sensitive areas, such as basic materials and transportation, as well as banks and consumer staples companies.  The oil and gas sector paused for breath after this year’s momentous rebound.  Telecom companies were under pressure.

Amid last month’s positivity, many questioned whether the recent gains are sustainable, or whether they represent a bear market rally.

It was a rewarding month for fixed income investors.  Global bonds rallied sharply after the US CPI release, which brought fresh hopes that the worst of the inflation rise is behind us.  Yields have fallen significantly from the highs reached in recent weeks.

UK gilts outperformed other sovereigns as the market settled down following September’s mini-budget chaos.  Chancellor Hunt’s Autumn Statement also served to restore some much-needed confidence in the government’s ability to manage the country’s finances.

Corporate bonds delivered strong returns as credit spreads narrowed.  Attractive headline yields have pulled in investor demand, providing a supportive technical backdrop in the lead up to the holiday season.

It is notable that, despite this current bout of investor enthusiasm, markets continue to express doubts about the path of the economy.  This can be seen most vividly through the inverted US yield curve, which typically portends recessionary conditions ahead.

The oil price fell, continuing its recent weakening trend.  It is now far below the peak price reached earlier in the year.  Meanwhile, the copper price rose as investors looked ahead to the re-opening the Chinese economy.

Against the backdrop of a falling US dollar and lower bond yields, the gold price was finally able to gain some ground.  Silver, which is more sensitive to positive economic trends and broad risk appetite, was a stand-out positive performer.

The US dollar was in the spotlight as it suffered its worst month in years.  This occurred as markets priced in less aggressive interest rate hikes from the US Federal Reserve.  Additionally, the currency’s safe haven attributes were less sought after amid a more positive backdrop for risk.  On the other side of the coin, the Japanese yen finally arrested its precipitous fall against the reserve currency.

The collapse of crypto exchange FTX, amid stories of chaotic book-keeping and absent governance, weighed upon cryptocurrencies.  Caught up in the contagion effect, BlockFi also went into bankruptcy.

Whilst AM&A’s active Model Portfolios underperformed against their benchmarks in November, they are still mostly significantly outperforming their benchmarks over the year to date.