This note contains an overview of our market views, what we are watching, and our portfolio strategy. These developments may not mean changes to your portfolio so please contact your Client Advisor for the latest update on your portfolio.
At a glance
How we’re positioned
- Last week was one of two halves. October closed with gold prices rising as investors fled to safe-haven assets amid geopolitical uncertainty and expectations of further rate increases, while equities continued the downward trend that started in the summer.
- However, the middle of the week brought a reverse in fortunes as we crossed into November. Equity prices rose while gold prices and bond yields fell.
- Despite the rebound in equity prices towards the end of last week (US equities recorded their best week of the year so far), it wasn’t enough to offset the fall in October.
- The jump in prices mainly came as a result of weakening economic data, including the all-important US jobs report (showing slower employment growth) and decelerating inflation rates (including lower-than-expected inflation in the Eurozone). This suggests that we may have seen the peak in interest rates in the West – the US Federal Reserve (Fed) and Bank of England (BoE) left rates unchanged last week.
- Turning to the bond market, the recent October highs in yields (10-Year US Treasury yields briefly hit 5%) may have been a soft ceiling as yields started to fall last week. This has been positive for portfolios, as the price of bonds increased as yields fell.
- Our diversified portfolios are designed to capture long-term growth trends whilst cushioning the blows when uncertainty picks up. And they are doing their job.
- As rates rose further in 2023, we increased our government bond exposure in the US, Eurozone, and the UK, which have started to perform recently.
- Given our expectation for weakening economic and earnings growth prospects, we hold more government bonds relative to our long-term allocation and are less exposed to riskier bonds.
- We also hold fewer equities relative to our long-term asset allocation. The majority of those we hold are large, high-quality, and low-volatility companies across the US and Europe. These tend to perform better than the overall market when volatility increases.
- We’re keeping a close eye on market developments, particularly potential opportunities from certain equity markets that have fallen by around 10% since their peak in late July 2023.
Past performance is not a reliable indicator of future returns.
What we’re watching
- We think the tightening cycle is over in the US. As such, we are revising our forecasts, expecting the Fed to now hold interest rates in the 5.25-5.50% range, before cutting them to 4.25-4.5% over the course of 2024. The Fed was careful in keeping interest rates on hold at its November meeting and the latest economic date fell significantly short of expectations.
- In addition, we think that the UK has reached the peak in interest rates, too. We are revising our Bank Rate forecast as economic activity is likely to contract in both the services and manufacturing sectors and inflations decelerates, albeit gradually. We now expect the Bank of England to hold the Bank Rate at 5.25% in 2023, before reducing it to 4.25% during 2024.
- This week is rather light in terms of economic data releases. October inflation is due in China (Thursday) and could continue to reflect the hurdles the Chinese economy faces. The UK economy has likely stagnated or perhaps even slightly contracted in the third quarter (Friday). But investors’ focus could be on political developments in the US as the 17 November deadline to get the government funded looms.
Information correct as of 06 November 2023.
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