INVESTMENT UPDATE NOVEMBER
| INDEX | LEVEL 30 SEPT | LEVEL 31 OCT | CHANGE* |
| S&P 500 | 5762 | 5705 | -0.99% |
| FTSE 100 | 8236 | 8110 | -1.53% |
| Euro Stoxx 600 | 522 | 505 | -3.26% |
| Nikkei 225 | 37919 | 39081 | +3.0% |
| Shanghai | 3336 | 3279 | -1.70% |
| US 10 Yr Treasury Yield | 3.80% | 4.28% | +0.48 |
| UK 10 Yr Gilt Yield | 4.01% | 4.43% | +0.42 |
| Bund 10 Yr | 2.13% | 2.42% | +0.29 |
*all returns in local currency terms
Overview
As can be seen in the table above, many markets were down in local currency terms during October. However, due to a weaker sterling against the dollar, returns were improved for UK investors (holding investments in a foreign currency when sterling weakens increases returns). The political backdrop of a US election and the prospect of the UK budget contributed to equity market volatility. However, both factors had a greater impact on respective government bond indices, with yields having risen significantly since their lows earlier this year (bond prices move inversely to yields). Investors are now wondering if the narrative for the bond markets has changed, with the likelihood of higher borrowing from governments, plus higher GDP growth and therefore the potential implications for higher inflation. This in turn might lead to interest rates being held at a higher level for longer than previously expected.
US
Although the US Presidential election dominated equity and bond markets during the month, there were also mixed pictures on the earnings front, particularly in relation to the likely returns from AI related investments. We saw a significant difference in investors’ expectations for the prospect for those semi-conductor companies benefitting from AI and those that are not. This was illustrated by the removal of Intel from the Dow Jones index, and it being replaced by Nvidia. Despite the latter’s progress during the month, the technology heavy Nasdaq index fell towards the end of the month. Smaller companies, likely affected by higher rates as indicated by higher bond yields, also struggled.
By far the dominant factor was the impact of the so called ‘Trump Trade’, where investors expected higher economic growth and higher borrowing levels from a Trump win, which contributed to the steep increase in US government bond yields. This also had the effect of increasing dollar strength, which had been weakening for some time. Whilst there has been plenty of rhetoric from the Trump side in the run up to the election, the extent to which tariffs and other policies will be applied is still extremely unclear. However, the effect is likely to be positive for certain US business at the expense of those overseas, particularly Europe and China.
On the economic front, the US economy is still in good shape and worries about unemployment creeping up have abated for now. With inflation heading in the right direction, following a year low inflation number, there is room for further rate cuts from the Federal Reserve.
Europe
In October, the European Central Bank (ECB) cut rates by 0.25% to 3.25%, and markets anticipate another rate cut is imminent in December. The latest cut: the ECB’s first back-to-back interest rate cut since the euro crisis in 2011, comes as the central bank aims to prevent a sharp slowdown in the Eurozone. At the October meeting, ECB President Christine Lagarde noted the fall in inflation surprised the central bank and said this meant a cut was needed to ensure a soft landing. Annual price growth in the Eurozone eased to 1.7% in September, down from 2.2% in August. Several European countries are experiencing slowdowns, although the outlook for Germany is particularly bleak, with the country on the brink of a recession. This has led the IMF to downgrade its forecast for German GDP growth next year.
UK
Aside from the Liz Truss era, October saw one of the most impactive budgets we have seen for some time. The newly elected government chose to increase spending in the pursuit of growth, whilst providing further funding for the public sector. The net result will see the highest tax take as a percentage of GBP since the second world war and it was businesses and savers that bore the brunt of providing the funding for it. The increase in national insurance contributions for employers was exacerbated by lowering the starting rate at which companies must pay this, and this was coupled with an increase in the minimum wage. There are clear implications for inflation as companies have indicated that these costs will have to be passed on to consumers. Personal pensions have now been brought into the inheritance tax regime and tax rates on gains for entrepreneurs on disposal of their business have been increased, as have capital gains tax rates. The net effect of the budget was to push up expectations for debt issuance by the government and, coupled with the possible inflationary effects, this led to the rise in government borrowing rates. Perhaps ironically, these are at a higher level that immediately followed the infamous Truss budget.
Meanwhile, October saw the UK inflation rate fall to its lowest level since April 2021 and below the Bank of England (BoE)’s 2% target, increasing the chances the BoE will cut rates at their next meeting. Price growth in the UK fell to 1.7%, driven by lower air fares and petrol prices, leading to BoE Governor Andrew Bailey saying the central bank could be a “bit more aggressive” in easing policy.
Japan
Following this year’s vein of snap elections being disastrous for the incumbent party, Japan’s ruling party, the LDP, suffered its worst result in 15 years. This has led to paralysis in the Japanese parliament, as the LDP can’t currently form a controlling government with its historic coalition partner. However, the stock market reaction was positive as PM Shigeru Ishiba is not considered business friendly and markets had the additional boost of a sharply weakening yen following the result. This was positive for exporters, whose share prices suffered following the summer rally in the currency (a weaker yen makes Japanese exports cheaper). A structurally weaker yen and higher wage growth, leading to rising inflation was welcome at modest levels, but the trend has become problematic with the Bank of Japan now seeking to control the currency and restrain inflation and it is likely to lead to more intervention.
Asia and Emerging Markets
In China, following their return after the Golden Week holiday at the end of September, investors were looking for further details from government agencies of the economic stimulus package that had been announced immediately preceding the holiday. This was not forthcoming, and the market soon saw a significant sell-off, at one point falling 8% in a day. However, the market is still up over 14% over the year now, having previously ben deep in the red. The market did receive additional support later in the month with the Peoples’ Bank of China reducing its headline loan rate. Markets now look to the country’s National Congress meeting in November to reveal further details of the stimulus package.
Elsewhere in Asia and Emerging Markets, markets fell, as they contended with higher US bond yields and a stronger US dollar, as many countries borrow in US dollars, so the cost of servicing this debt rises. The prospect of a Trump win is likely to have also an impact on these economies should he impose further tariffs.
Outlook
With the prospect of a Trump Presidency ahead, it is difficult to have clear visibility as to how much of his rhetoric will translate into policy. Even a Republican Senate may prove some restraint. However, with portfolios remaining diversified, we aim to reduce any impact here. The situation in Japan means it is likely that the weighting here in the models will be reduced. Despite the budget, the UK market still offers good relative value. We still have the prospect of further rate cuts globally, even if the rate of change differs between territory, which is ultimately positive for equities.
One area we have continually suggested that needs active management, and wide diversification is required is in the fixed interest portion of portfolios. With potential changes in the inflation and government bond issuance profile, particularly in the UK and US, this means we are likely to be actively reducing the portfolios’ sensitivity to interest changes here, particularly in the sovereign bond area.
Rockhold Asset Management, with contribution from Alpha Beta Partners, Marlborough and LGT, November 2024