What’s happened in markets?

FTSE All Share 1.00 7.89 -1.60 -1.04 -0.87 3.28 3.39
Euro Stoxx 50 4.88 15.90 3.22 -7.10 -8.28 4.43 4.72
S&P 500 5.93 11.39 -4.70 -15.09 -12.79 10.72 11.03
Japan Topix 3.26 5.69 3.40 1.76 0.80 7.63 4.33
MSCI Asia Pac. 7.67 8.59 -8.60 -23.26 -25.71 -0.94 -0.98
MSCI Emerg. Mkts. 5.75 8.31 -7.13 -21.89 -24.61 -1.25 -1.00
Jo’burg All Shares 5.31 13.27 4.67 3.69 10.79 13.51 8.01
UK Gov’t Bonds 2.31 12.13 -9.77 -21.33 -21.89 -6.86 -2.44
US Gov’t Bonds 1.75 0.38 -5.25 -13.14 -13.00 -2.68 -0.19
Global Corp. Bonds 2.16 1.99 -5.54 -15.64 -15.80 -2.80 0.37
Emerg. Mkt. Local 4.04 5.00 -4.22 -13.74 -14.78 -5.23 -1.52
Figures in the respective local currencies as at the end of trading on 11/11/2022.

The week of 7 November saw strong gains in all major asset classes following cooler than expected inflation data from the US. The headline consumer price index (CPI) came in at 0.4% for October, below the 0.6% expected, bringing the annual inflation figure to 7.7%. Although still well above the Federal Reserve’s (Fed) target rate of 2.0%, this was lower than expected and marked the slowest increase since January, which triggered a strong rally across markets. The Fed reaction was more muted, however, with speakers after the CPI report stating there was still a long way to go with inflation, albeit acknowledging this was a step in the right direction. In other economic data, US weekly jobless claims rose to 225,000, slightly worse than the 220,000 expected, but still low compared to long-term averages.

In US politics, the much anticipated Republican red wave in the midterm elections became more of a red ripple as the Democrats retained control of the US senate, although the race for Congress is still undecided.

In the UK, gross domestic product for the third quarter fell by 0.2%, the first quarterly decline in more than a year. This was a slightly smaller contraction than expected, but the Bank of England has already forecast a recession that could last two years. This highlights the challenges faced by the chancellor, Jeremy Hunt, when he delivers his autumn budget on 17 November, which promises tough decisions on tax and spending as he attempts to tackle the UK’s £55 billion budgetary hole.

The European Commission also forecast an imminent recession in the eurozone, due mainly to issues with energy supplies and prices caused by the Russia-Ukraine conflict. However, Germany reported better that expected industrial output, as its industrial production rose 0.6% in September (beating the 0.1% increase expected).

On the corporate front, Disney disappointed the market with weak earnings due to rising content and marketing costs, despite its subscriber numbers being up 14.6 million in its fiscal fourth quarter. And as layoffs in the beleaguered tech sector spread, Meta announced it was to lay off 11,000 employees, around 13% of its workforce, as it sinks more money into the metaverse.

In other news, there was heightened volatility in the cryptocurrency market due to a liquidity crunch within FTX, an unregulated exchange. The company faces bankruptcy without a cash injection.

The better-than-expected CPI report from the US set the tone for markets over the week. Although there were other positives too, as advances by Ukraine forces in the Russian conflict and China easing some of its COVID-19 restrictions also supported markets. The massive rally on Thursday saw the S&P 500 gain 5.5% (its best day since April 2020) and the tech-heavy NASDAQ close 7.4% higher (its best day since March 2020).

Developed market equities (+11.1%) outperformed emerging markets (+3.0%) over the last 30 days. In terms of style, value (+11.9%) outperformed growth (+8.4%), while small and large capitalisation stocks were both up, +10.5% and +10.0% respectively. Industrials (+15.0%) was the best-performing sector, while communication services (+1.65%) remained the worst. Energy, the best performing sector over previous weeks, was up (+11.9%), while technology stocks (+11.6%) saw a boost given their higher sensitivity to interest rates and the prospect of slowing rate increases.

Government bonds also participated in the rally, with the yield on the two-year Treasury note having the biggest daily decline since October 2008. Bond prices and yields move in opposite directions, so bond prices rise as yields fall. The longer dated bonds benefited most due to better expectations on inflation.

The US dollar had its worst daily performance since 2015 on Thursday, following the CPI report, paving the way for sterling to reclaim levels not seen since before the UK mini-budget. The US dollar had remained strong while more rate hikes were priced in, but with the cooler than expected inflation data, the currency markets immediately priced in lower rate increases and triggered the fall.

Latest Consensus Forecast
UK GDP (QoQ) -0.2
UK PMI 48.2
UK CPI (YoY) 10.1 10.7
EU GDP (QoQ) 0.2 0.2
EU PMI 47.3
EU CPI (YoY) 10.7 10.7
US GDP (QoQ) 2.6
US PMI 54.4
US CPI (YoY) 7.7

What’s happened in portfolios?

In equities, it was the quality funds that bounced back most strongly following the lower-than-expected CPI release, which benefitted our quality tilt within portfolios.

Within fixed income, our longer duration government bonds, the more interest rate sensitive part of the market, were well supported on the back of falling yields and helped our performance.

Good news too on the real assets front as 3i Infrastructure announced impressive half-year results with its net asset value up over 9%, against its target for the year of 8-10%. This was driven strongly by the inflation sensitivity of the portfolio and energy prices, due to its exposure to renewables. BCPT, our commercial property trust, also rebounded well, up nearly 30% since we picked up stock during the recent volatility.

We also saw a strong rebound in several of the alternative strategies, including the investment trusts, as volatility settled a little within the UK market. Last week saw returns of around 5-6% for most of the alternative strategies, as well as for real assets, which gives us a differentiator versus the core bond peer group for income.

What’s happening this week?

16 November • US Retail Sales (Oct) | 17 November • EU Consumer Price Index (Oct) | 17 November • UK Autumn Statement