October Issue 2022
Summary
Global equity markets continue to be volatile, sentimental and focused on the short-term. Leading the dance is the US Federal Reserve (Fed), which is marching markets along to a tune of elevated inflation data and ever tighter monetary policy.
Equity Snapshot
| United States | • | US equities rebounded, with the S&P 500 Index recording its first monthly increase since July, amid growing hopes that the Federal Reserve (Fed) would soon start to ease back the rate at which it is raising rates. The tech-heavy Nasdaq Index lagged the broader S&P 500 Index as growth stocks were hit by a wave of disappointing news from high-profile companies. In contrast, value shares rallied strongly. Smaller US companies also outperformed their larger counterparts by a sizeable margin over the month. |
| • | US inflation slowed to an annual rate of 8.2% in September, while core consumer prices, which exclude food and energy, accelerated to 6.6%, compared to 6.2% in August and the highest rate in four decades. The data increased pressure on the Fed to raise rates by a further 75 basis points at their next meeting in November. According to the futures markets, US rates are now expected to peak at 5% in May 2023. The current range for the Fed funds rate is 3.00-3.25%. | |
| Europe | • | European equities rallied strongly over October (in EUR terms). Sentiment was lifted by hopes the deteriorating economic outlook might prompt the European Central Bank (ECB) to be less aggressive in raising rates. There was also relief over the UK government’s U-turn over short-lived prime minister Liz Truss’ unfunded spending plans. A drop in European gas prices further helped sentiment, although the EU remained split on whether to impose an energy price cap. Germany, in particular, came under fire from other nations less able to afford to emulate its plans for an EUR 200 billion protective shield for its citizens and businesses. |
| • | Euro-zone economic growth slowed to 0.2% over the third quarter as the energy crisis and high inflation hit activity. The flash estimate of the S&P Global euro-zone composite purchasing managers’ index fell to 47.1 in October, the lowest reading since November 2020, with both services and manufacturing activity moving further into contraction territory. Headline inflation accelerated to a fresh record high of 10.7% in October, while core inflation hit 5.0%. The ECB enacted its second consecutive 75-basis-point hike in October, taking rates to 1.5%, their highest level since 2009. | |
| Asia | • |
Asian equity markets declined over October. Regional returns were hindered by weak performances in both China and Hong Kong, with most of the weakness coming towards the end of the month after the Communist Party Congress concluded and the US imposed export controls aimed at restricting China’s access to semiconductors. In this environment, Taiwan equities also sold off, dragged lower by the index heavyweight Taiwan Semiconductor Manufacturing (TSMC). On the other hand, Australian stocks rallied, closing the month at a six-week high. The Reserve Bank of Australia raised rates by a smaller amount than had been expected and this marked a slowdown from earlier 50-bps increases. South Korean stocks also advanced. ASEAN markets outperformed the broader region with most markets other than Singapore delivering positive returns. |
| Bond | • | Global bonds were mixed. US Treasury yields rose over the month, while European sovereign bond yields mostly declined modestly. UK bonds were the standout performers due to the UK government’s fiscal U-turn. the 10-year Gilt yield closed the month at around 3.5%, back to levels seen prior to September’s mini-budget. In the credit markets, high-yield bonds outperformed investment-grade debt. Economic data continued to indicate that the economic backdrop was deteriorating. The IMF warned of stormy waters for the global economy, highlighting that there was a growing risk of recession in 2023. The European Central Bank (ECB) raised rates by a further 75 basis points (bps) but hopes of a more dovish tilt to overall monetary policy were boosted when the Bank of Canada and Reserve Bank of Australia enacted smaller-than-expected rate hikes. |
| Outlook | • | Global equity markets continue to be volatile, sentimental and focused on the short-term. Leading the dance is the US Federal Reserve (Fed), which is marching markets along to a tune of elevated inflation data and ever tighter monetary policy. Investors are poised for a key change, with markets often rallying sharply on encouraging datapoints. Yet so far, these have proved to be short-lived refrains and any moves in this direction missteps. |
| • | At its November meeting, the Fed affirmed its plan for still higher interest rates. Chair Powell did not only note that the bank’s terminal rate will be higher than previously expected, but has also remained more concerned about under-tightening than over-tightening. Thus, while rates may rise at a slower pace than before, they are also likely to remain there for longer. As such, investors positioning portfolios solely on the basis of a potential pivot risk being disappointed. | |
| • | Without such a turnaround, the path for corporate earnings is being scrutinised more closely. Unlike in the previous quarter, companies reporting Q3 numbers are likely to be incorporating the full impact of higher energy, labour and material costs, as economic growth trends downwards. The extent to which companies can sustain margins in these conditions will be a clear indication of their cyclicality, pricing power and capital discipline. | |
| • | At the same time, valuations remain volatile. Multiples have largely pulled in from their “low interest rate world” highs and this has created some select opportunities. However, many names perceived as defensive continue to command a premium and with so much macroeconomic uncertainty, investors are pricing securities on increasingly short-term datapoints. Consequently, earnings events (and forward guidance perhaps even more so) are likely to trigger sharp reactions in either direction. | |
| • | Our task in the coming months remains the same. We continue to seek high cash flow-generating companies which, through their value proposition, should be able to grow and compound their earnings over the long term. At its heart, this task centres around distinguishing between market noise and fundamentals. We believe that this – rather than any change in our philosophy or process – will best serve our clients. | |
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November Issue 2022
Summary
Global equities continue to march to the Fed’s tune, as they have for most of 2022. Shares have rallied for two consecutive months, due to softer inflation numbers and a dovish interpretation of the central bank’s minutes.