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.
Equity Snapshot
| United States | • | US stocks moved higher over November, ending the month on a strong note as Federal Reserve (Fed) chair Jay Powell suggested it may be appropriate to slow the pace of US rate rises. The broad-based S&P 500 Index outperformed the tech-heavy Nasdaq Index as value shares outpaced growth-oriented companies. The US mid-term elections failed to deliver the anticipated red wave of Republican wins: while the Republicans regained control of the House of Representatives by a narrow margin, the Democrats retained control of the Senate. Former President Donald Trump announced he would be running in the 2024 presidential elections, despite a disappointing performance from many of the candidates he had backed. |
| • | US GDP growth for the third quarter was revised up to an annualised rate of 2.9%, but economic momentum appears to be weakening in the fourth quarter. The flash estimate of S&P Global’s US composite purchasing managers’ index (PMI) dropped to 46.3 in November from 48.2 in October. The manufacturing PMI fell to 47.6, signalling the first contraction in US manufacturing activity since the height of the pandemic in mid-2020. Meanwhile, activity in the services sector slid to a lower-than-expected 46.1, the second-fastest rate of contraction on record, excluding the early stages of the pandemic, as high inflation and rising interest rates hit demand. US inflation eased to 7.7% in October, the smallest 12-month increase since January, while core inflation fell to a year-on-year rate of 6.3%, compared with 6.6% in September. | |
| Europe | • | November was another strong month for European equities. The FTSEurofirst 300 Index closed the month at a six-month high as sentiment was lifted by hopes that central banks would be less aggressive in raising rates. Speculation that China may be easing its strict zero-COVID policy also boosted stocks. |
| • | Economic news suggested reasons for optimism. Euro-zone inflation eased to an annual rate of 10.0% in November, down from 10.6% in October and the first decline in 17 months. The flash estimate of the S&P Global euro-zone composite purchasing managers’ index (PMI) beat expectations, rising slightly to 47.8 in November. While manufacturing activity remained in contraction territory for the sixth consecutive month, manufacturers reported an easing in supply chain delays and a slowdown in cost increases. However, activity in the services sector was unchanged from October's 21-month low. | |
| Asia | • |
Asian equity markets rebounded sharply in November as growing hopes that China would ease its zero-Covid policy boosted markets across the region. Markets were also lifted by signs that inflationary pressures may be diminishing. Australian stocks closed November at the highest level in almost seven months. Elsewhere, Taiwanese shares rebounded strongly as investors piled back into semiconductor stocks. Indian equities also rose, closing the month at a record high in local currency terms, although the monthly gains lagged those in China. ASEAN markets underperformed the broader region as investors rotated out of Southeast Asia and into China, Taiwan and South Korea. Philippines and Singapore posted solid gains, but Malaysia, Thailand and Indonesia were laggards. |
| Bond | • | Global bonds rallied on hopes that central banks may start to reduce the pace at which they raise rates. US GDP growth for the third quarter was revised up to an annualised rate of 2.9%, but economic momentum appears to be weakening in the fourth quarter. As widely expected, the Fed hiked rates by a further 75 basis points in November, taking the federal funds rate to a range of 3.75%-4%. In the accompanying statement, Fed chair Jay Powell said the US central bank had revised up its estimate of the terminal rate, but later hinted that the Fed would likely slow the pace at which it raises rates with a 50-bps increase in December’s meeting the most likely outcome. European bonds advanced over November amid growing hopes that the peak in inflation may have passed and that central banks could be less aggressive in raising rates. Peripheral euro-zone bond yields fell even more, particularly in Italy, narrowing the spread with German Bunds. |
| Outlook | • | 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. Yet against this optimism, global economic data continues to deteriorate, as do corporate earnings expectations. Ongoing developments in China are also a healthy reminder that large parts of the world continue to be driven by factors outside of financial markets. |
| • | Markets are now pricing a peak in US interest rates for June 2023, with a steady reduction towards 4% by the end of the year. This marks a downshift from early November, after a weaker than expected 7.7% US consumer price index print. Investors have also seized on Chair Powell’s remarks that “the time for moderating the pace of rate increases may come as soon as the December meeting”. With Covid supply chain issues now largely resolved, and a further doubling of the oil price unlikely, equity markets are hopeful that these headwinds are abating. | |
| • | Yet, this optimism does not seem to be shared by Powell himself, who has remarked that “cutting rates is something we don’t want to do soon, so that’s why we are slowing down”. In short, higher rates and inflation may last longer than the market currently expects. At the same time, economies around the world are slowing. The International Monetary Fund (IMF) has repeatedly revised down its growth expectations and the US bond yield curve remains firmly inverted. | |
| • | Companies, for their part, have done their best to manage down expectations. Across the MSCI ACWI, 2023 EPS growth forecasts have roughly halved according to IBES data. Weaker demand, higher costs and in some cases a backlog of inventory that had been purchased at higher prices, all threaten to erode corporate profitability. Similarly, optimism about China’s economic reopening and its potential GDP boost appear well ahead of realities on the ground. Within the Global Growth team, we are acutely focused on how managements are communicating and responding to these changes. | |
| • | While highly sentimental markets continue to misprice stocks on the basis of short-term data, we also need to be open to any instances of structural weakness. Within portfolios, the flurry of recent earnings reports has largely been positive. Companies like Microchip, LVMH and Novo Nordisk are reporting resilient revenues and demonstrating the steady pricing power that we expect with our quality growth investment philosophy. Where names like Catalent and Amazon have reported softer near-term outlooks, we have been quick to engage management and test our investment theories. | |
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As ever, December is rife with predictions for the coming year. After a two-year global pandemic, a European land war and runaway inflation, all of which were unforeseen, we remain hopeful that readers share our cautious approach to the investment exercise. We view the above events as considerations shared by the equity market and to which both the share prices of our holdings and we as portfolio managers will likely react. However, while the market takes a more short-term view, it is by focusing squarely on long-term company fundamentals that we will be able to best serve our clients. | |
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December Issue 2022
Summary
At its latest meeting the Fed sought to stamp out once and for all any notion that a return to easy monetary policy is imminent. While US consumer price inflation appears for now to have peaked at 9.1% in August, core inflation ex-housing remains stubbornly elevated.