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
The strong rise in equity prices since the start of November was briefly brought back down to earth last week following a Thursday speech by US Federal Reserve (Fed) Chairman Jerome Powell. Powell said he and his colleagues “are not confident” that their current policies are enough to bring inflation back to their 2% target.
Equities and bonds reacted differently, underscoring our call that high-quality bonds already reflect the prevailing economic environment, unlike equities. Powell’s remarks led to a brief fall in US equity prices but recovered quickly on Friday to end the week up. Despite a slight uptick on Thursday, global bond yields remained roughly flat during the week, with 10-year US Treasury yields staying at around 4.6%.
Economic data continued to be subdued last week. The UK’s third quarter GDP release showed that the UK economy was almost stagnant compared to the previous quarter. High borrowing costs and cost-of-living pressures were having an impact. UK equities dropped following the news.
In China, October’s consumer and producer price data showed that the world’s second-largest economy is in mild deflation.
Elsewhere, Brent oil prices fell about 5% last week, signalling slowing global demand despite the supply restriction announced by OPEC+ earlier this year and the Israel-Hamas conflict. Gold was also down 2%.
How we’re positioned
Overall, the backdrop remains in line with our expectations. The global economy continues to slow. From a high level, inflation is decelerating too. So, despite the Fed’s comments, we believe Western central banks won’t raise rates again this year. This scenario supports our overall cautious positioning and investment in higher-quality assets.
Therefore, we are sticking with our current portfolio positioning, holding more government bonds and less riskier bonds relative to our long-term allocation.
Our underweight equity position is also unchanged. We hold mostly large, high-quality companies across the US and Europe, which are less volatile than the broader market. Hence, when volatility increases, these tend to perform better than the overall market.
Past performance is not a reliable indicator of future returns.
What we’re watching
A potential US government shutdown from 17 November is a key topic of discussion this week as political consensus has so far been hard to achieve. Government budget deadlines and shutdowns can typically cause short-term market volatility, but only a prolonged crisis may be more meaningful for the US economy and markets. For now, it seems the markets expect a resolution, given the lack of significant swings in equity and bond prices.
In the US, inflation and durable goods orders are key data points this week. Markets would welcome a fall in inflation, which is projected to decelerate more meaningfully, as it helps the case for not increasing rates again. However, core inflation, which strips out volatile components such as good and energy, is likely to have remained roughly unchanged and fairly elevated, though past the peak too. Surprises in durable goods orders may increase volatility.
China retail sales and industrial production are also out this week. If these reports confirm that a recovery in China is underway or that at least the worst is over, sentiment may improve towards Chinese/Asian equities as well as global manufacturing and industrial sectors connected to China.
Germany’s ZEW survey, which measures the sentiment of German institutional investors, is expected to turn positive this week, suggesting investors feel the worst is behind them.
UK inflation and retail sales may confirm the continuation of the current trend of weak growth, with the pace of increase in consumer prices moderating more visibly, though remaining fairly elevated.
Information correct as of 13 November 2023.
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