What’s happened in markets?

FTSE All Share 1.53 -4.26 -4.60 -7.05 -4.24 1.85 1.92
Euro Stoxx 50 2.81 -0.41 -3.13 -16.58 -13.56 1.70 2.44
S&P 500 4.75 -0.87 -5.76 -20.27 -16.25 9.42 9.72
Japan Topix -0.85 -1.12 -2.59 -3.31 -3.57 7.42 4.09
MSCI Asia Pac. -1.43 -9.95 -16.21 -30.36 -33.45 -3.20 -2.45
MSCI Emerg. Mkts. 0.21 -7.09 -11.99 -27.83 -30.93 -3.05 -2.39
Jo’burg All Shares 2.02 -0.59 -1.38 -6.94 4.06 9.54 6.36
UK Gov’t Bonds 4.88 -4.71 -14.68 -25.93 -23.31 -8.90 -3.61
US Gov’t Bonds -1.06 -3.91 -6.99 -15.05 -14.18 -3.65 -0.63
Global Corp. Bonds -0.77 -4.87 -7.91 -18.49 -17.80 -3.96 -0.32
Emerg. Mkt. Local -0.98 -4.88 -4.83 -18.93 -19.84 -7.16 -3.02
Figures in the respective local currencies as at the end of trading on 21/10/2022.

Economic data releases from the US gave a mixed view on the effectiveness of the Federal Reserve’s (Fed’s) interest rate hikes. The labour market remained resilient, with the US weekly jobless claims falling to 214,000, an unexpected decrease of 12,000 from the previous week. In contrast, the housing market showed more signs of weakness as existing home sales fell for an eighth consecutive month to an annualised rate of 4.71 million in September, according to the National Association of Realtors. This was the lowest level in a decade, apart from the short-lived falls of April and May 2020 during the first wave of the pandemic.

In the UK, inflation returned to a 40-year high of 10.1% in September, matching July’s figure and an acceleration from the 9.9% reported in August. The main driver was the soaring cost of food staples such as meat, bread, milk and eggs, which offset price drops for petrol.

The political and economic turmoil continued as Liz Truss became the shortest serving UK prime minister in history when she resigned on Thursday 20 October, after 44 tumultuous days in office. Her government collapsed following the market reaction to her mini-budget plans to cut taxes and increase borrowing and spending. The newly appointed chancellor, Jeremy Hunt, had wasted no time in announcing a U-turn on most of her proposals in his medium-term fiscal plan on Monday 17 October, including changes to the energy price guarantee for households, which does not bode well for inflation.

In other news, China’s 20th Communist Party Congress opened on 16 October for the week and Xi Jinping consolidated his leadership position. In an unusual move, the release of its Q3 gross domestic product figures, along with other economic data, was delayed without giving a rescheduled date. The People’s Bank of China maintained its one-year medium term lending facility at 2.75% and injected 500 billion yuan (approximately US$69 billion) into the banking system, as it attempted to retain liquidity in its pandemic-hit economy.

It was a relatively strong week for corporate earnings with Lufthansa, Netflix and Goldman Sachs reporting better than expected results. Although it must be remembered that earnings expectations are currently depressed. Tesla, on the other hand, fell short of revenue expectations.

In market news, developed markets (-2.0%) rallied, particularly in the US, following dovish comments from Fed members, but emerging markets (-7.1%) lagged over the last 30 days. In terms of style, value (-2.3%) outperformed growth (-3.8%), while large capitalisation stocks (-2.3%) led small capitalisation stocks (-3.8%). Energy (+8.1%) remained the best performing sector, with oil slightly recovering (+4.6%), while utilities (-12.0%) was the worst performer.

In fixed income, global government bond returns dropped (-3.4%), with short duration continuing to outperform (1-3 years -0.4%, 7-10 years -3.2%). Investment grade (-5.0%) and high yield bonds (-3.3%) were also down.

The Japanese yen reached 150 per US dollar for the first time since 1990 and solidified its 10th consecutive weekly decline. This reflects the strong US dollar and the different monetary policies of their central banks. The Fed is obviously tightening aggressively, while the Bank of Japan is still intervening in markets and keeping rates low.

Latest Consensus Forecast
UK GDP (QoQ) 0.2
UK PMI 47.2 48.0
UK CPI (YoY) 10.1
EU GDP (QoQ) 0.8
EU PMI 47.1 47.6
EU CPI (YoY) 9.9
US GDP (QoQ) -0.6 2.3
US PMI 56.7 56.0
US CPI (YoY) 8.2

What’s happened in portfolios?

It remains a challenged environment for equities in the face of persistent inflation, rising interest rates and slowing growth. We continue to tilt our equity positioning towards quality focused strategies. Over October, we’ve had some positive numbers from our developed market equities and some good earnings releases which has been helpful. Our value active manager Dodge & Cox is up almost 3% this month given its overweight to energy and banks.

Within our investment grade credit and government bonds holdings, the funds with the longer duration have underperformed.  This follows the US economic data on jobless claims which resulted in more hawkish comments from the Fed, which in turn pushed yields higher.

Real assets remain attractive as an alternative to fixed income and with some inflation protection. Defensives renewables and infrastructure holdings have performed better than more cyclical holdings, such as property, of late.

Alternative Strategies are preferable in the current environment to provide a credible diversifier within portfolios. Our UK holdings, such as GCP Asset Backed Income, did well last week following the U-turn on the mini-budget, which also helped sentiment across most UK assets.

Cash is becoming more attractive given market volatility and higher interest rates. It can also be swiftly deployed as opportunities arise.

What’s happening this week?

24 October • UK Purchasing Managers’ Indices | 24 October • US Purchasing Managers’ Indices | 27 October • EU ECB Interest Rate Decision