October’s investment market commentary

The detractors were inflation concerns, which put downward pressure on bond prices, and uncertainty coming from China, in the form of regulation and Evergrande (China’s largest property developer).  This put downward pressure on emerging markets in particular.

On the plus side, corporate earnings growth was strong during the third quarter, despite lingering supply and demand issues.  Growth in earnings is important because equity valuations are quite fully priced, so this growth addresses the earnings side of one of the most commonly used metrics: the price / earnings ratio. In fact, of the 299 companies that had reported for the S&P500, 81% have posted better-than-expected earnings and 67% have surprised on the upside in terms of revenue. The sectors that beat Q3 profit estimates the most were financials, energy and healthcare.

Global equity markets were positive (+5.0%), with emerging market equities (+0.9%) lagging developed markets due to contagion fears from the Evergrande saga. In terms of style, growth stocks (+6.1%) outperformed the more value orientated equities (+4.1%) . This was also reflected in sector performance with consumer discretionary and information technology among the best performing areas, while more defensive and, to some extent, more interest rate sensitive utilities and consumer staples lagged.

Within fixed income markets, concerns over inflation, rising commodity prices, and the expectation of faster interest rate rises meant most bond markets generated negative returns for the month. Looking at the detail, while global government bonds (-0.1%), global high yield (-0.7%) and emerging market local currency debt (-0.7%) all declined, global investment grade credit (+0.3%) managed to buck the trend.

In terms of real assets, property markets generated an equity-like return over the month with the global REITs index up +5.3% over the period. Commodities were all positive, with crude oil (+10.7%) up the most, providing further fuel to already high inflationary expectations.

We continue to favour equities over bonds, which are more sensitive to inflationary pressures.  This is a favourable environment for equities: even though interest rates may rise, this is from a very low base, as households have accumulated significant savings, governments are encouraging spending and we are yet to see the full spectrum of innovation which we expect as a result of the pandemic. Additionally, cash waiting on the sidelines to be invested remains high, so if equities were to sell off we anticipate this would be temporary.  Our preference remains for developed markets, particularly for pan-Europe, where economies are reopening and valuations are not as stretched (especially as compared to the US, although we can see pockets of opportunity within US small caps).

This month’s values quoted as at 29/10/2021. The above values are sourced from Bloomberg and are quoted in the relevant currency.