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
- This week, the conflict between Israel and Hamas continued to dominate the headlines. Looking at markets, oil prices rose, and, unlike the previous week, equity prices fell.
- Only time will tell if the conflict significantly impacts markets. We’re already positioned conservatively but are monitoring whether the impact remains contained or could start being felt across markets, especially if tensions broaden to the wider region.
- In the context of our flagship portfolios, the fall in equity prices this week hasn’t greatly affected performance. Equities make up a smaller portion of our portfolio relative to our typical long-term strategy and, those we do own are weighted towards more low-volatility stocks. Our positions, on net, have been broadly flat last week.
- Turning to the fixed income market, the upward trajectory of government bond yields seemed to slow towards the end of last week, but only after the yield on a 10-year US Treasury briefly hit 5% – a level not seen since 2007.
- The shift in momentum came as US Federal Reserve Chair Jerome Powell gave a gentle pushback on the prospect of further rate increases. He noted that a “range of uncertainties” makes the task of controlling inflation without doing “unnecessary harm” to the economy more difficult. These comments suggest to us that we are likely at or close to the peak in US interest rates and so we’re positioned accordingly.
- Elsewhere, UK inflation came in slightly higher than expected but didn’t lead to markets expecting further rate increases as the UK economy continued to slow.
- In China, economic growth for the third quarter was better than expected. However, markets didn’t react, and Chinese equities continued to fall amid a worsening property crisis
- As we enter another week of geopolitical unrest, and given the market backdrop, we have not made any changes to our portfolio positioning. We still hold more high-quality government bonds and fewer riskier bonds and equities relative to our long-term asset allocation.
- If tensions in the Middle East remain and developed economies continue to battle high inflation, investors may turn away from equities and flock to the guaranteed yield of high-quality government bonds. If that is the case, portfolio performance will benefit as this demand would push bond prices higher.
- Within equities, we own low-volatility stocks across the US and Europe. These stocks are in sectors like consumer staples (such as food and household goods) and healthcare, which we believe are likely to perform better than the overall market if uncertainty was to increase.
Past performance is not a reliable indicator of future returns.
What we’re watching
- The European Central Bank (ECB) meeting is on Thursday, where we expect the ECB to leave interest rates at 4.50%.
- Purchasing managers’ indices (PMIs), which serve as a timely indicator for economic activity, are also due on Tuesday in the Eurozone, UK and US. We believe these will likely show a slowing in activity, painting a recessionary picture in several Eurozone countries and the UK.
- We believe that the first US economic growth estimate for the third quarter is likely to have remained solid, though more timely indicators such as the PMIS point to slowing activity going forward.
Information correct as of 23 October 2023.
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