Investment Update — November 2022
Global equities delivered high single-digit returns in October on hopes that the Fed may soon begin slowing the pace of rate hikes. The Bank of Canada and the Reserve Bank of Australia have recently shifted to smaller interest rate rises, and other central banks will follow suit. The Bank of England have just raised rates to 3%, but signalled that market expectations for future rate increases were too high.
They, like most central banks, will soon accept a longer period of above-target inflation to avoid dragging their economies into deep recessions.
A new UK government and a policy U-turn after September’s disastrous mini-budget saw gilt yields tumble, easing the pressure on borrowing costs and mortgage rates. This also eased pressure on the Bank of England to deliver an outsized rate hike at their November meeting, or make an emergency intervention in currency markets. Sterling has also recovered from an all-time-low against the dollar.
US and European equities were the best performers over the month, whilst China’s struggles dragged down the wider Asia-Pacific region. US stocks benefited from better-than-expected third quarter earnings, whilst falling gas prices in response to a period of mild weather have eased Europe’s energy crisis. China’s zero-Covid policy and residential property issues continues to weigh on sentiment, but rumours that they will soon abandon the former have intensified in recent days.
Despite a rebound in equity markets over the month, we believe the fundamental outlook continues to deteriorate. The Fed will keep raising rates until inflation has definitively peaked, or unemployment increases materially, although weaker domestic growth and frothy housing markets will limit the extent to which other developed market central banks raise interest rates.
US housing and manufacturing data indicate that the US economy is contracting, and this was corroborated by the tech sector which has reported a decline in advertising spending and consumer demand. Corporate earnings will soon start to decline if the US economy slows as we expect it too.
A global recession in 2023 is looking unavoidable, and unemployment is likely to rise. This will weigh on equity markets in the coming quarters, but as inflation rolls over and economic activity slows, we expect central banks to change course. This creates opportunities for investors in bond markets, with US 10-year government bonds now yielding 4%, and sterling corporate bonds yielding more than 6%.
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Please note: These are our views, as always, and don’t constitute advice in any way. The value of investments can fall as well as rise and past performance is not a guide to the future. The content of this publication is for information only. It does not represent personal advice or a personal recommendation, and should not be interpreted as such. Please do not act upon any part of it without first having consulted an Independent Financial Adviser.