Investment Update – November 2023
Global equities fell for the third consecutive month as fixed income markets suffered more upheaval. The US stock market has now fallen by nearly 10% since July, in dollar terms, although weakness in October was widespread and spanned both developed and emerging markets. US 10-year Treasury yields briefly hit 5% as investors digested a strong Q3 GDP report, mostly driven by strong consumer spending, and fretted about higher US government borrowing to fund a widening budget deficit.
It was a volatile month for other asset classes with oil falling 11%, despite conflict in the Middle East, gold rising 7% and industrial metals falling 3.5%. Listed real estate and listed infrastructure also suffered falls of 5% and 3% respectively.
Headline inflation in the US and UK came in slightly higher than expected, due to higher petrol prices, but European inflation fell more than expected. Core inflation across all regions was in-line with expectations. Economic activity in the UK and Europe continued to weaken, with the US economy remaining an outlier. As expected, the European Central Bank kept interest rates on hold.
The recent falls in equity markets seem appropriate given the rather dramatic sell-off in bonds, and while valuations are now slightly more attractive, we don’t think this represents a compelling buying opportunity. Bonds appear to offer greater value in absolute terms, and relative to equities. Weaker growth, falling inflation and easier monetary policy favour bonds in the near-term.
Central banks continue to peddle the higher for longer narrative to prevent an easing of financial conditions, but the fact remains that they will respond to incoming data. The disinflation trend in the Euro Area has intensified since the summer, and recent economic data has delivered negative surprises. We expect the Bank of England and European Central Bank to begin cutting rates next year, possibly as early as spring.
The US appears to be on the cusp of a slowdown, and we anticipate weaker economic growth in the final quarter of this year and into 2024. The resumption of student loan repayments and higher oil prices will drag on consumer spending, and slower jobs growth should gradually translate into higher unemployment. With the Fed making good progress on inflation, monetary policy is looking increasingly tight.
Cash and money market funds are an attractive option with interest rates in the UK standing at 5.25%, and we own a money market fund in the VT Esprit funds. However, this opportunity may be short-lived if the Bank of England starts to reduce interest rates next year. In this environment, we’d expect UK government and corporate bonds to outperform the returns from cash. Beaten-up areas of the equity market, such as UK smaller companies, may also enjoy a re-rating.
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Head of Investment, Skerritts
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Categories: Investment update
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