What’s happened in markets?

FTSE All Share 1.48 7.52 0.81 1.00 2.14 3.56 3.83
Euro Stoxx 50 1.04 10.71 8.19 -4.75 -4.60 5.19 5.31
S&P 500 1.56 4.52 -3.70 -14.30 -13.01 10.47 11.04
Japan Topix 2.59 5.82 3.22 3.84 2.28 8.38 4.99
MSCI Asia Pac. -0.39 14.88 -6.30 -22.24 -24.05 -0.59 -1.15
MSCI Emerg. Mkts. -0.09 11.64 -5.74 -21.33 -22.47 -1.04 -1.31
Jo’burg All Shares 0.81 11.18 5.88 3.95 8.82 13.20 7.86
UK Gov’t Bonds 0.61 4.35 -3.70 -20.02 -20.51 -6.60 -2.35
US Gov’t Bonds 0.86 2.56 -3.11 -12.28 -11.70 -2.74 -0.07
Global Corp. Bonds 1.21 4.77 -2.21 -13.68 -13.12 -2.35 0.73
Emerg. Mkt. Local 1.26 6.92 -0.81 -12.81 -11.54 -4.71 -1.68
Figures in the respective local currencies as at the end of trading on 25/11/2022.

The week of 21 November saw mixed economic news. The US flash purchasing managers’ indices (PMI) were disappointing, with readings of 47.6 (against 50.0 expected) for manufacturing and 46.3 (against 48.2 in October) for the composite.  As these are forward-looking indicators, there is a suggestion that momentum in the US economy may be slowing. In contrast, durable goods orders for October were strong coming in at 1.0%, better than September and above the 0.4% expected. However, this indicator tends to be more volatile and is not adjusted for inflation. It is a measure of investment and spending on goods that are expected to last longer than three years.

The latest minutes from the Federal Open Market Committee (FOMC) suggested the majority now believes it will ‘soon’ be appropriate to slow the speed of rate hikes, so possibly going down from 75 basis point increases to 50 basis points. Although recently there has been a slight disconnect between what is said in the FOMC minutes and the Federal Reserve (Fed) rhetoric.

UK PMIs also disappointed, indicating UK business activity had contracted for a fourth consecutive month in November. The composite PMI came in at 48.3 in November, slightly up on 48.2 in October, but the fourth successive figure below the 50 level, fuelling recession fears in the UK.

Signs of recession were also prevalent in the eurozone where business activity shrank for a fifth month in November. Early composite PMI figures defied economists’ expectations and rose slightly to 47.8 (from 47.3 in October) but remained under 50 – signifying a contraction.

In other news, we continue to see tightening monetary policy around the world. The Reserve Bank of New Zealand increased its rates by 75 basis points, up to 4.25%, and signalled further tightening to come.

In China, hopes of a further loosening of its zero-COVID-19 policy were dashed following a surge in new cases. More mass testing and localised restrictions on movement were imposed raising further concerns over the economic outlook of the world’s second largest economy. Although there were some signs that the authorities may provide more support to stimulate the economy.

Headwinds continued from Russia with deliberations over potential gas restrictions through Ukraine, which could affect other parts of Europe. Although Europe is currently in a stronger position than it was, as gas storage levels are high, around 94%, and the winter so far has proved mild.

It was a relatively quiet week with the Thanksgiving holiday in the US, but markets resumed their rise and were still generally positive following the better-than-expected inflation report and the more recent dovish comments from the Federal Reserve. Market performance remained broad based over the last 30 days, with emerging market equities (+10.7%) creeping ahead of developed markets (+6.8%). In terms of style, value (+8.4%) continued to outperform growth (+5.9%), while there was still little to differentiate performance between small (+7.3%) and large (+7.1%) capitalisation stocks. Materials (+11.2%) was the best performing sector, while consumer discretionary (+2.5%) was the worst performer. Energy (+5.5%) and technology stocks (+7.5%) were both down on the previous week.

In fixed income, we’ve seen better performance at the long end as interest rate expectations have come down, with the longer duration 7–10 year government bonds (+1.9%) outperforming the shorter 1-3 year maturity (+0.9%). More interest rate sensitive investment grade credit (+4.1%) is also doing well.

Having been extremely strong over the last year, the US dollar has been weaker more recently, given the dovish comments in the FOMC minutes and the lower US inflation figure.

Latest Consensus Forecast
UK GDP (QoQ) -0.2
UK PMI 48.3
UK CPI (YoY) 11.1
EU GDP (QoQ) 0.2
EU PMI 47.8
EU CPI (YoY) 10.6
US GDP (QoQ) 2.6 2.8
US PMI 54.4 53.9
US CPI (YoY) 7.7

What’s happened in portfolios?

There was no real change in terms of positioning and portfolio themes, but we continue to closely monitor the critical issues affecting markets at the moment. The main headwinds remain the Russia-Ukraine situation and the COVID-related lockdowns in China, both of which continue to affect inflation, supply chains and economic growth around the world.

As markets have fallen, we’ve seen more attractive valuations, but we must remain cognisant of these persistent headwinds. In terms of sentiment and positioning, we are taking a more cautious view and we’ve been slowly diversifying the portfolio where we see opportunities arise.

The signs of slower growth easing the inflationary pressures and signalling potentially fewer rate hikes has been encouraging for our equity holdings. Our Dodge and Cox Global Stock Fund outperformed the MSCI All Country World Index (ACWI) because of its cyclical bias. While Fundsmith Equity Fund and Morgan Stanley Global Brands have benefited from their overweight to the interest rate-sensitive tech sector, which has seen even greater gains. All three funds are up around 9 to 10% over the month.

In fixed income, investors have moved to price in a less aggressive pace of rate hikes from the Fed over the coming months, and that has seen yields fall, which has meant our longer duration funds both in investment grade and government bonds have outperformed their shorter duration counterparts. In particular, PIMCO Global Investment Grade Credit stood out because of the flexibility it has of investing in the more cyclical parts of the market, such as high yield and emerging market debt.

On real assets, we wanted to highlight our indirect holdings in property and infrastructure, both Nedgroup Global Property Fund and Atlas Global Infrastructure have followed equities higher given the risk-on environment and falling yields. Atlas is up by 17% over the month, outperforming its 50% equity and 50% fixed income benchmark by 11%, which represents the opportunity cost of investing in real assets. They’ve also been helped by the falling yields we’ve seen recently and the inflation-linked cash flow they provide.

In our alternative strategies, Princess Private Equity has paused new investments to strengthen its liquidity position and hopes to resume dividends in June 2023. This followed issues with higher currency hedging costs given the strength of the US dollar against the euro.

What’s happening this week?

30 November • EU Consumer Price Index (Nov) | 1 December • UK S&P Global Manufacturing PMI (Nov) | 2 December • US Nonfarm Payrolls (Nov)