What’s happened in markets?

FTSE All Share -1.89 -6.23 -2.47 -8.45 -5.79 1.27 1.57
Euro Stoxx 50 0.19 -5.10 -0.17 -18.86 -15.74 1.17 1.88
S&P 500 -1.53 -9.09 -5.07 -23.88 -18.03 8.23 8.90
Japan Topix -0.45 -1.63 1.23 -2.47 -2.07 8.45 4.54
MSCI Asia Pac. -4.16 -11.56 -13.46 -29.37 -30.60 -2.43 -2.20
MSCI Emerg. Mkts. -3.81 -10.17 -9.85 -28.00 -29.65 -2.76 -2.54
Jo’burg All Shares -2.00 -4.48 1.50 -8.78 0.89 9.40 5.97
UK Gov’t Bonds -1.82 -10.73 -18.29 -29.38 -28.20 -10.80 -4.48
US Gov’t Bonds -0.77 -3.28 -5.55 -14.14 -14.05 -3.37 -0.52
Global Corp. Bonds -1.34 -4.81 -6.34 -17.85 -17.84 -3.69 -0.21
Emerg. Mkt. Local -1.46 -5.23 -3.12 -18.13 -19.43 -6.71 -2.96
Figures in the respective local currencies as at the end of trading on 14/10/2022.

Hopes of a breakthrough against relentless inflation were crushed by higher-than-expected US consumer and producer price index data. CPI jumped by 0.4% in September, double what economists had expected, and the core measure rose by 0.6%. PPI growth was 0.4%, again twice the anticipated rise. Weekly unemployment claims were marginally higher than expected, at 228,000.

Turmoil swept the UK political and economic landscape. The government successively unpicked elements of last month’s mini-budget in an attempt to calm the markets, after its unfunded tax cut plans hit sterling and gilt yields. With the Bank of England’s temporary support for bonds due to end on Friday 14 October, the Chancellor, Kwasi Kwarteng, was abruptly ousted. His replacement, Jeremy Hunt, is due to set out a medium-term fiscal plan during the week of 17 October; the likely effect is tax rises, a complete reversal of the mini-budget’s direction.

The biggest corporate news was PepsiCo’s hike in profit and sales outlook for the rest of the year, on the back of positive third-quarter earnings. The group now expects full-year revenue growth of 12% and earnings-per-share growth of 10%.

The week saw big shifts in bond and equities markets. The prospect of a Federal Reserve pivot on interest rate hikes had boosted stocks, but continuing acceleration of prices wiped out those gains. The market rallied again, however, following the higher-than-expected inflation figures, notching up a swing of 5.5% on the S&P500 Index within a single day.

Overall, developed markets (-7.8%) are outperforming emerging markets (-12.7%), while value stocks (-6.7%) are faring better than growth (-9.9%). Small capitalisation stocks are down by -8.5% and large by -8.0%. Energy is the best-performing sector (+0.5%) and oil has rallied again (+3.0%). Utilities (-16.3%) and global property (-14.3%) are faring worst.

Global government bond returns dropped (-3.1%), with short duration continuing to outperform (1-3 years -0.8%, 7-10 years -3.0%). Investment grade (-4.5%) and high yield bonds (-4.7%) also suffered. Longer-duration UK bond yields increased as the Bank of England warned pension funds of the Friday deadline for its temporary support.

Latest Consensus Forecast
UK GDP (QoQ) 0.2
UK PMI 49.1
UK CPI (YoY) 9.9 10.0
EU GDP (QoQ) 0.8
EU PMI 48.1
EU CPI (YoY) 10.0 10.0
US GDP (QoQ) -0.6 2.0
US PMI 56.7
US CPI (YoY) 8.2

What’s happened in portfolios?

With equity markets facing headwinds, the portfolio has been more defensively positioned than usual. But our value managers, such as Dodge & Cox, have outperformed given the recent upward shift in yields.

We remain broadly neutral in fixed income, having started the year underweight. We benefited on a relative basis from the fixed income swings noted above. Although longer-dated credit and government bonds have suffered as inflation continues to surprise to the upside.

Real assets are still favoured, providing inflation protection and better long-term visibility of earnings. Investment trusts came under pressure at the start of the week due to the UK chaos, but recovered as the government changed tack.

In alternative assets, Hipgnosis announced a share repurchase programme, reflecting management’s view that it is underpriced. While this may put net asset value under pressure, we see the move as a good value opportunity.

Market volatility continues to make cash more attractive at present, so it can be swiftly redeployed when opportunities arise.

What’s happening this week?

18 October • US Industrial Production | 19 October • UK Consumer Price Index | 19 October • EU Consumer Price Index