Despite persistent inflation, slowing growth and expectations of further interest rate rises, equity markets notched a positive month in October, the first positive month since July.
Global Equities (local currency)
Some relief for investors in October
While still a difficult year, investors will welcome the relief October provided with equities up 6% and bonds also slightly positive. Meanwhile European natural gas prices continue to fall, providing some optimism that energy driven inflation will begin to ease next year.
*As at 31.10.2022
Recent events in the UK
The UK started the month with the Bank of England needing to extend the emergency bond buying programme it introduced in September amidst soaring bond yields, which, in turn, triggered a liquidity problem for UK pension funds.
By mid-October Kwasi Kwarteng had been fired and the new chancellor, Jeremy Hunt, quickly set about reversing the measures Truss and Kwarteng had introduced in their September mini budget.
The UK ended the month with Rishi Sunak replacing Liz Truss as Prime Minister on October 25th and promising to fix the mistakes that she had made. While it is still early days, so far, the market is judging the changes at the top of the UK government as relatively positive.
Meanwhile, UK inflation hit a 40 year high of 10.1%. Concerning political and economic times for our nearest neighbour and important trading partner.
Interest Rates continue to march upwards
Interest Rates continue to increase in the midst of slowing growth and high inflation. The Fed and the Bank of England both followed the ECB in raising interest rates by a further 0.75%.
The Fed
The Fed indicated that they now expect to have to raise rates to a higher level than they previously thought given the fact that inflation has remained stubbornly high in a resilient US economy, where the labour market remains very tight and consumer spending remains good. The Fed also sought to change market focus from the pace of rate rises, which to this point has been very fast. Instead, they point to two questions: how high rates will need to go and how long they will need to hold them there, in order to get inflation back to 2%. Core inflation is currently just over 5% in the US with headline inflation over 8%.
Bank of England
The Bank of England’s 0.75% increase was accompanied with a very gloomy economic outlook and inflation reaching over 10%. The Bank is forecasting a recession (for five quarters) and spoke about being plunged into the longest recession since the second world war if rates were to increase much further. In Acuvest we worry about the fact that the UK recession may be made worse than needed now that the government is also promising to raise taxes. Such pro-cyclical fiscal policy seems to us to be counterproductive.
ECB
Meanwhile, Christine Lagarde is striking a hawkish tone ahead of the ECB’s next rate setting meeting in December saying that a “mild recession” in the Eurozone would not be enough to “tame inflation” which hit 10.7% in October.
Earnings & Job Losses
Quarter three earnings season is largely complete and, in general, earnings have proved relatively robust so far. But digging beneath the surface two major themes emerge:
- Banks are enjoying bumper profits benefiting from the rise in interest rates. They join energy companies, who benefit from higher energy prices, in now being the target for calls to tax or levy these super profits.
- Meanwhile, the tech sector is starting a realignment process. The message emerging is that tech companies over hired during the COVID19 boom and with slowing revenues are now hitting the brakes and either pausing recruitment or looking to lay off staff. Big names like Twitter, Stripe, Lyft, Meta (Facebook) and Intel have all announced sizeable job cuts in order to reduce their costs and prepare for more difficult economic times ahead.
Expect 2023 to be a relatively difficult year for company revenues with many companies seeking to take action now to protect earnings.
Other Important Developments
War in Ukraine
On October 31st Putin said Russia was suspending the UN – brokered deal to allow grain to move out of Ukraine before lifting the suspension in recent days. Unfortunately, the current deal runs out November 19th and it looks like Putin is again prepared to threaten global food security in order to advance his military goals.
China
In China, the 20th Communist party conference saw Xi Jinping consolidate his power. A worrying development is that one of the key messages that came through from this conference is that the previous focus on economic growth seems to be replaced with a new emphasis on national security. Against the current backdrop one would have to judge the risk of China seeking to take control of Taiwan as higher now than at any time in the recent past.
US
Meanwhile, in the US the midterms take place this week. The most recent analysis of opinion polls suggests democrats will lose control of the House. The Senate may well be a tighter run affair but given the current 50/50 split in the Senate, it seems likely to also tip towards republicans making for a US that is policy constrained over the next two years.
COP27
Finally, COP27 kicks off in Egypt as I write. With so much else going on in the world it is easy to lose sight of the climate problem. The message is not good. Right now, the world is failing in this regard, and we will not be successful in containing temperature rises to just 1.5%.
Our Investment Outlook
A few weeks on from last month’s Markets in 1 Minute we maintain and repeat here our outlook:
- We are in for a tricky couple of years and economically things will get worse before they get better.
- Central banks will continue to raise interest rates even in the face of slowing growth.
- Markets will continue to be very volatile.
- The rise in bond yields means that in time bonds will become a more interesting investment for long-term investors.
- The rise in bond yields is causing a re-pricing of lots of other assets and you can expect to see that downward pressure continue to show up in property, private equity and other illiquid asset prices.
- As higher costs begin to bite on household incomes expect consumer spending to reduce and ultimately this will feed into reduced company revenue / earnings.
Our advice remains unchanged: For short-term investors, this is not a market to be in but for our clients who are long-term investors, we continue to advise them to follow their plan and use market weakness to build on positions.
John Tuohy is Chief Executive of Acuvest, an Irish-owned, independent advisory firm specialising in wealth management, pensions, and investment advisory services for individuals, companies, pension schemes, charities, and institutions. John is a Chartered Financial Analyst (CFA) and a Fellow of the Chartered Association of Certified Accountants.
