Financial Advice Cornwall

January 2023 Market Review

February 20, 2023February 20, 2023Carlton Smith Financial Planning

A look back on markets in January when stocks posted strong gains.

The month in summary:

Stock markets started 2023 on a strong footing with gains across global equities. China’s re-opening after dropping the zero-Covid policy in late December helped propel the advance. Signs that inflation is easing from its autumn highs in several major regions also supported sentiment, amid hopes central banks may be close to the peak of their rate hiking cycle. Emerging markets outperformed their developed counterparts. In fixed income markets, bond yields fell (meaning prices rose). Commodities saw a negative return for the month.

Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

US equities made robust gains in January. Investors’ focus on inflation – which cooled for the sixth successive month in December – remains sharp. The headline consumer price index (CPI) dropped to 6.5% from 7.1% mainly due to energy and food cost moderation. In combination with a stronger-than-expected GDP print of 2.9% (seasonally adjusted annual rate), the inflation data led investors to position for slower rate rises from the Federal Reserve from here. Risk appetites picked up, despite expectations of a slightly softer earnings season compared to Q4 2021.

Economic data elsewhere was mixed but encouraging. Industrial activity – as measured by the S&P Flash Composite PMI – improved somewhat in January (to 46.6 from 45.0) but remains in contraction territory. (The PMI indices are based on survey data from companies in the manufacturing and services sectors. A reading below 50 indicates contraction, while above 50 signals expansion.) Employment data was more supportive, with weekly jobless claims below expectations. At 186,000, the weekly jobless claims was the lowest since April and well below expectations of 205,000.

The reversal in sentiment touched the majority of the market, with almost all sectors stronger over the month. Traditionally defensive areas of utilities, consumer staples and healthcare, were snubbed in favour of more growth oriented names. The strongest gains were linked to tech or consumer discretionary spending. Travel and auto stocks were amongst the month’s strongest gainers, while entertainment and media stocks also advanced.

Eurozone

Eurozone shares were among the best regional performers in January. Top performing sectors included economically-sensitive areas of the market such as information technology and consumer discretionary. Real estate also enjoyed a rebound after poor performance in 2022. Within consumer discretionary, luxury goods stocks were particularly strong following the news of China’s economic reopening. Energy was the weakest sector while defensive areas like utilities and healthcare also underperformed.

Eurostat data showed the eurozone economy eked out 0.1% of growth quarter-on-quarter in Q4, a slowdown from 0.3% growth in Q3. Forward-looking indicators raised hopes that the eurozone may continue to avoid recession. The flash eurozone composite purchasing managers’ index for January registered a seven-month high, coming in at 50.2 after 49.3 in December.

Inflation edged lower again in December. The annual inflation rate was 9.2% compared to 10.2% in November. The highest contribution to inflation came from food, alcohol and tobacco, with energy in second place as natural gas prices remained below their elevated levels of 2022. European Central Bank President Christine Lagarde warned that further interest rate rises would still be needed to return inflation to the 2% target.

UK shares posted gains in January although the advance was more muted than in some other regions. The consumer discretionary and financials sectors were among the top gainers. Laggards included more defensive sectors such as consumer staples and healthcare. Economically sensitive areas of UK equities outperformed in line with other markets. This occurred amid growing hopes that the US Federal Reserve might be in a position to ‘pivot’ to cutting interest rates in late 2023.

UK small and mid cap equities (smids) outperformed as domestically focused consumer stocks did particularly well, partly amid signs the UK economy is holding up better than expected. Consumer stocks generally delivered much more encouraging trading updates than had been feared. When combined with very low expectations this drove some very strong share price performances from the retail, travel & leisure and housebuilding sectors. Domestically focused banks also performed well, although more broadly the banking sector benefited from its emerging markets exposure amid China reopening hopes.

Recent UK macroeconomic data suggested underlying growth has been more resilient than previously thought, partly helped by an easing of energy prices, driving hopes for a milder-than-feared recession. The latest updates on monthly GDP for November revealed that the UK economy unexpectedly grew in November, expanding by 0.1%.

Japan

The Japanese stock market rose throughout January, reversing the decline seen in December. The total return for the month was 4.4% in local terms. The yen initially strengthened against the US dollar, in line with the trend seen from November, before giving back some of the gain in the second half of the month.

Investors’ attention remained focused on the Bank of Japan, following the surprise adjustment to the yield curve control policy which was announced in mid-December. In early January, with 10-year bond yields testing the Bank of Japan’s new upper limit, there was some speculation that more changes could be made at the January policy committee meeting. In the event, policy was left unchanged and discussion moved instead to the likely candidates to replace Mr Kuroda as governor of the Bank of Japan. The prime minister, Mr Kishida, is likely to nominate the new governor in the first half of February.

The debate continued over inflation and whether it will be sustained at a level above the Bank of Japan’s 2% target. Preliminary surveys of the spring wage negotiations suggest that moderate wage growth is probable, but it may not be sufficiently high to provide a definitive trigger for any policy change at the central bank.

At the very end of January, the corporate results season began for the quarter ending in December. Only a minority of companies had reported before the end of the month. Early indications suggest a positive tone, especially as service companies should see a benefit from improved demand after the final lifting of Covid restrictions and a resumption of travel subsidies.

Asia (ex Japan)

Asia ex Japan equities recorded a positive performance in January. Chinese shares achieved robust gains after Beijing loosened its Covid-19 restrictions that have constrained the country’s economic growth since early 2020. Government measures to support the country’s property market and a loosening of the regulatory crackdown on China’s technology companies also bolstered investor sentiment.

Other Asia Pacific markets also gained after Hong Kong and China resumed quarantine-free travel, signalling the end of China’s zero-Covid policy which had kept borders closed for nearly three years. Shares in South Korea and Taiwan achieved significant growth in the month on renewed investor optimism, while gains in Hong Kong were slightly more muted. In Hong Kong, technology, travel and consumer stocks were particularly strong. Singapore also ended the month in positive territory after an upbeat global forecast for Asian markets helped allay investor fears of an economic slowdown. Property, financial and industrial stocks performed particularly well in the month.

The Philippines, Thailand, Indonesia and Malaysia also achieved solid growth. India was the only index market to end the month in negative territory, amid a sell off by foreign investors and investor caution as economic growth stalls.

Emerging markets

Emerging market (EM) equities benefited from January’s risk-on environment. Signs of cooling inflation in the developed world fuelled optimism that interest rates may soon peak, with potentially positive consequences for growth. Developments in China also boosted investor sentiment. These included the ongoing re-opening of the economy, easing of regulatory pressure on the internet sector, more policy support for the real estate sector and better-than-expected Q4 GDP growth of 2.9% year-on-year. The MSCI EM Index outperformed the MSCI World Index over the month.

Czech Republic was the best-performing index market as a state-owned power utility company rallied strongly. Mexico followed close behind, despite a slowdown in economic activity indicators, including weaker manufacturing data, and a slight rise in inflation. Meanwhile, Taiwan and Korea both outperformed, supported by strong returns in their tech sectors, as the outlook for global growth and trade improved. Chile and Peru performed better than the index too, helped by higher copper prices as optimism about China’s re-opening drove industrial metals prices higher. While Hungary was ahead of the index, and Poland, just behind, both markets continued to rebound following months of poor performance in 2022 after Russia’s invasion of neighbouring Ukraine.

Brazil underperformed. Macroeconomic data softened while inflation rose and anti-government riots in Brasilia, the country’s capital, damaged government buildings. South Africa lagged the index amid an ongoing energy crisis, with the state-owned power supplier announcing permanent rolling blackouts for at least the next two years. Thailand, Indonesia and Malaysia posted returns behind the index, as did Qatar and Saudi Arabia, with the latter two impacted by generally weaker energy prices.

India generated negative returns amid allegations of fraud and share price manipulation at a major conglomerate. Turkey was the biggest underperformer as investors booked profits after very strong returns in recent months.

Global Bonds

Global government bond yields fell in January (i.e. prices rose) on encouraging news on inflation – particularly out of the US. The month was light on central bank meetings, but the market began anticipating a slower pace of rate hikes by the Federal Open Market Committee (FOMC). The Bank of Canada hiked rates by 25 basis points (bps) but signalled a pause in its hiking cycle, while the Bank of Japan made no further adjustments to its yield curve control policy, despite a sharp rise in core inflation.

Credit markets did well and outperformed government bonds both in the US and Europe and across both high yield and investment grade markets. (Investment grade bonds are the highest quality bonds as determined by a credit rating agency; high yield bonds are more speculative, with a credit rating below investment grade.) Risk sentiment improved as signs of moderating inflation and better-than-expected growth (especially across the eurozone and China) saw investors dial back some of their worst recessionary fears.

Meanwhile activity data in the US pointed to further weakness. The better-than-expected fourth quarter GDP was driven by a significant build up in inventories, while other near-term and forward looking indicators, including retail sales and industrial production, fell.

Headline inflation rates in both the US and the eurozone continued to ease, driven by retreating energy prices. While there was a modest uptick in month-on-month US core inflation, the general disinflationary trend here is clear. In contrast, core inflation across the eurozone has remained sticky and is likely to prompt a further hawkish response from the European Central Bank (ECB).

The US 10-year yields fell from 3.88% to 3.51%, with the two-year falling from 4.42% to 4.21%. Germany’s 10-year yield declined from 2.57% to 2.29%. The UK 10-year yield fell from 3.67% to 3.34% and 2-year dropped from 3.56% to 3.46%.

The US dollar was weaker against most other developed market currencies. The Australian dollar was the strongest performer among G10 currencies, following much stronger than expected inflation and supported by optimism around China’s re-opening. There was broad-based strength across emerging market currencies, given indications that US interest rates would soon peak.

Convertible bonds benefitted from the equity market tailwinds, but once more failed to convince in their upside participation. The Refinitiv Global Focus gained 4.8% in US dollar terms, lagging the advance of the MSCI World index. January turned out a good month for primary market activity. We saw USD 5.4 billion of new paper was issued with a good regional split between the US and Europe. Convertibles are trading about 1% below their fair value with Asia remaining the cheapest region.

Commodities

The S&P GSCI Index recorded a negative performance in January. Energy and livestock were the worst-performing components of the index, while industrial metals and precious metals achieved strong gains. Within energy, the price of natural gas was sharply lower in the month, Within industrial metals, the price of lead fell in January, while zinc, aluminium and copper all achieved robust gains. Within agriculture, wheat and cocoa prices fell in January, while sugar and coffee recorded significant price growth. Within precious metals, the price of gold was significantly higher than a month earlier, while silver fell back slightly.

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

Quarterly Markets Review – Q3 2021

October 7, 2021Carlton Smith Financial Planning

A look back at markets in Q3, which started well for shares but then saw gains erased amid rising inflation and worries over China.

Developed market shares were flat (in US dollar terms) in Q3. Declines in September erased prior gains. Emerging market equities underperformed amid a sell-off in China.
Global sovereign bond yields were little changed in the quarter. The US Federal Reserve said it would soon slow the pace of asset purchases.
Commodities gained with natural gas prices seeing a sharp spike.

US equities notched up a small positive return in Q3. Strong earnings had lifted US stocks in the run up to August, when the Federal Reserve (Fed) seemed to strike a dovish tone, confirming its hesitance to tighten policy too fast. However, growth and inflation concerns late in the quarter meant US equities retraced their steps in September.

The Fed stated in September that tapering of quantitative easing (i.e. a slowdown in the pace of asset purchases) will be announced at the November meeting, as expected, and will finish by mid-2022. Meanwhile, the fed funds rate projections now show a faster rate hiking schedule than they did in June. The median rate expectation for 2023 moved up to three hikes from two in June, with three additional hikes in 2024. Fed officials were evenly split 9-9 on a rate hike in 2022.

The shift comes in the context of revised real GDP growth – down to 5.9% for 2021 from the 7% growth estimated in the last meeting – while inflation has risen. The Fed now sees inflation running to 4.2% this year, above its previous estimate of 3.4%. The Fed raised its GDP projections for 2022 and 2023 to growth of 3.8% and 2.5%, respectively.

On a sector basis, financials and utilities outperformed. At the other end of the spectrum, industrials and materials struggled, although September’s sell-off hit almost all sectors. Energy was an exception, rising as supply constraints drove prices to highs – particularly Brent crude.

Eurozone

Eurozone equities were flat in Q3. The energy sector was one of the strongest performers, as was information technology with semiconductor-related stocks seeing a robust advance. Consumer discretionary stocks were among the weakest for the quarter, with luxury goods companies under pressure amid suggestions that China could seek greater wealth redistribution, which could hit demand.

The quarter had started with gains amid a positive Q2 earnings season and ongoing economic recovery from the pandemic. The Delta variant of Covid-19 continued to spread but most large eurozone countries have now fully vaccinated around 75% of their population against the virus, enabling many restrictions on travel and other activities to be lifted.

However, as the period progressed, worries emerged over inflation due to supply chain bottlenecks and rising energy prices. Annual inflation in the eurozone was estimated at 3.4% in September, up from 3.0% in August and 2.2% in July. The European Central Bank said that it would tolerate any moderate and transitory overshoot of its 2.0% inflation target.

The end of the period saw a surge in power prices as a result of low gas supply and lack of wind over the summer, among other factors. High power prices should be positive for utility firms. However, the sector – particularly in southern Europe – is susceptible to political intervention as evidenced by announcements of price caps in Spain and other countries. The utilities sector was a laggard in the quarter.

Germany held a general election which saw the Social Democrats (SPD) take the largest share of the votes. Coalition talks are now under way over the formation of a new government.

UK equities rose over Q3 with the market driven by a variety of factors. While there were some clear sector winners (such as energy on the back of a recovery in crude oil prices) the difference between the best and worst-performing stocks, or dispersion, was quite marked. Within consumer staples, for instance, some of the more highly valued consumer goods companies performed poorly, while the more lowly valued grocery retailers performed well.

Merger & acquisition (M&A) activity remained an important theme. The period began with a recommended counter-offer for Wm Morrison Supermarkets and bid activity was seen across a variety of areas. Gaming remained an area of interest, with a proposal from US sports betting group DraftKings to acquire Entain. Within industrials there was headline-grabbing bid for aerospace and defence equipment supplier Meggitt. This in part explains the positive contribution from the consumer discretionary and industrial sectors, with the latter also helped by the easing of transatlantic travel restrictions and dollar strength against some weakness in sterling.

Small and mid cap (SMID) equities suffered in line with higher growth areas of the market more generally in September, but performed very well over the quarter a whole. SMID caps remained a sweet spot for M&A activity and made a useful contribution to overall market returns.

The Bank of England took a more hawkish tone as inflationary pressures continued to surpass expectations. Business surveys confirmed that supply bottlenecks are constraining output. Natural gas and fuel shortages made headlines towards the period end. These developments were also reflected in higher market interest rates, which helped support financials. However, Asian focused banks were lower in the period given the growing uncertainty around the outlook for Chinese markets and the economy.

Japan

The Japanese equity market traded in a range through July and August before rising in September to record a total return of 5.2% for the quarter. The yen showed little trend against the US dollar for most of the period before weakening at the very end of September to reach its lowest level since the start of the pandemic in early 2020.

Throughout the pandemic, Japan has consistently seen a lower infection rate than most developed countries but faced a much more serious test during early summer as infections picked up rapidly. Public opposition towards the government’s approach ratcheted up again and the approval rate for the Suga cabinet fell to the lowest levels seen since he took office in September 2020.

On 3 September, in a surprise decision, Prime Minister Suga announced his intention to resign without contesting the LDP leadership election. Mr Kishida was ultimately elected as LDP party leader and becomes Japan’s 100th prime minister. An establishment politician within the LDP, Mr Kishida should be essentially a safe, if unexciting, choice to guide Japan through the next stage of its post-Covid recovery. There is unlikely to be a change in the direction of monetary or fiscal policy as a result, and the likely shape of next major stimulus package should emerge over coming weeks..

It now seems likely that the upcoming general election could be held at the earliest practical date, on 31 October or, at the latest, mid November. Mr Kishida also inherits a stronger position in the vaccination programme which has sustained strong momentum in recent months after the very slow start seen in the first half of the year.

Although corporate results for the quarter that ended in June were strong, sentiment was impacted in August by the announcement from Toyota Motor of production cuts in September and October, due to the global shortage of semiconductors. Elsewhere for corporate Japan, order trends and capital expenditure plans continue to look strong.

Asia (ex Japan)

Asia ex Japan equities recorded a sharply negative return in the third quarter, largely driven by a significant sell off in China. This was partially due to concerns over the ability of property group Evergrande to service its debts. The Evergrande situation sparked global investor concerns over potential spill over risks.

Market concerns over inflation and the outlook for interest rates also dampened investor confidence during the quarter. China was the worst-performing index market, with sentiment towards the country also weakened by the government’s regulatory crackdown affecting the education and technology sectors. Power outages in China and the rationing of energy also spooked investors, hurting production of key commodities. The downside risks in China have significantly increased against a backdrop of slowing economic activity and concerns that recent regulatory policies will further weigh on growth.

Pakistan was also sharply weaker as ongoing political upheaval in neighbouring Afghanistan weakened investor sentiment towards the country, with fears that violence and unrest could spill over into Pakistan. Hong Kong and South Korea followed China lower, with both markets sharply lower as market jitters over China spilled out into the wider region.

India was the best-performing index market during the quarter and achieved a strongly positive performance as accommodative monetary policy and the easing of Covid-19 restrictions boosted investor sentiment. Indonesia also achieved a positive return. Singapore was almost unchanged, while declines in Taiwan and the Philippines were modest compared with the falls seen in other index markets.

Emerging markets

Emerging market (EM) equities declined in Q3, which saw a sell-off in Chinese stocks, concern over continued supply chain disruptions, and worries over the implications of higher food and energy prices for some markets. US bond yields rose towards the end of the quarter. Regulatory actions in China were the initial trigger for market weakness. These were compounded by the re-imposition of some Covid-19 restrictions and supply chain disruption in August, worries about possible systemic financial system risks stemming from the potential collapse of Evergrande, and power shortages.

Brazil was the weakest market in the MSCI EM index as above-target inflation continued to rise and the central bank responded with further interest rate hikes. Meanwhile Q2 GDP growth disappointed, developments in China weighed on industrial metals prices, and political rhetoric picked up ahead of next year’s presidential election. South Korea also posted a double-digit fall amid falling prices of dynamic random access memory chips (DRAM) price and concerns over the impact of power issues in China on production and supply chains. Weaker industrial metals prices also weighed on performance of net exporter markets Peru and Chile.

By contrast, net energy exporters in general outperformed, most notably Colombia, Russia, Kuwait, Saudi Arabia, Qatar and the UAE. India delivered a strong gain, with sentiment boosted in part by the recent stream of initial public offerings. The economy continued to recover while vaccinations picked up – India is now on track to deliver at least one dose to 70% of its population by November.

Global Bonds

US and European government yields were unchanged for the quarter as an initial decline reversed in September amid a hawkish shift from central banks and continuing inflationary pressure. The UK underperformed, with a significant rise in yields on increased expectations for monetary policy tightening.

The US 10-year Treasury yield finished at 1.49%, one basis point (bps) higher. Yields fell initially, as the rapid economic recovery appeared to be moderating. However, as the market’s focus turned to rising inflation and the prospect of the withdrawal of monetary policy support, yields rose back to similar levels seen at the beginning of the quarter. The Federal Reserve (Fed) became increasingly hawkish, suggesting that asset purchase tapering could start as early as November and that it could be wound up by mid-2022, earlier than expected.

The UK 10-year yield increased from 0.72% to 1.02%, with the move occurring in September. As with the Fed, there was evidence of a marked hawkish shift among Bank of England (BoE) policymakers, with a suggestion that rate rises might be warranted before the end of the year. Recent economic indicators came out worse than expected, while year-on-year consumer price inflation rose to 3.2% in August, the highest since 2012.

In Europe, the German 10-year yield was one basis point (bps) lower at -0.19%. Italy’s 10-year yield finished 4bps higher at 0.86%. Economic activity continued at a robust pace, the region benefiting from the release of pent-up demand, having come out of lockdowns relatively late. Eurozone inflation hit a decade high of 3.4% year-on-year in August.

Among corporate bonds, high yield made positive returns, while investment grade credit was little changed. European investment grade outperformed government bonds, while the US market was in line with Treasuries. Investment grade bonds are the highest quality bonds as determined by a credit rating agency; high yield bonds are more speculative, with a credit rating below investment grade.

Emerging market government bond yields rose, particularly in September, though EM corporate bonds made a small positive return. Emerging market currencies broadly fell against the US dollar.

Over the quarter, convertible bonds could not benefit from the early tailwind provided by positive equity markets but provided some protection in September as equities declined. The Refinitiv Global Focus index, which measures balanced convertible bonds, shed -2.1% for the quarter. The valuation of convertibles cheapened slightly as a result of strong primary market activity. More than $25 billion of new convertible bonds were launched in the quarter.

Commodities

The S&P GSCI Index recorded a positive return in the third quarter, driven by sharply higher energy prices caused by increased demand in the wholesale gas market. Energy was the best-performing component in the quarter, with all subsectors achieving a positive result. The price of natural gas was significantly higher in the quarter, closely followed by gains in the prices of gas oil and heating oil. Unleaded gasoline also gained strongly on stronger demand as consumers started to return to normal consumption patterns after the Covid-19 crisis.

The industrial metals component was modestly higher, with a sharp rise in the price of aluminium offsetting price declines for lead, copper and nickel. The price of zinc was almost unchanged. The precious metals component also declined, with the price of silver sharply lower. The price of gold was also lower, but the decline was more modest.

The livestock component also declined. The agriculture component reported a small decline in the quarter, with sharp declines in the prices of corn and soybeans offsetting higher prices for cotton, cocoa, Kansas wheat, coffee and sugar.

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

Monthly Markets Review – October 2020

November 9, 2020November 9, 2020Carlton Smith Financial Planning

A look back at markets in October when Covid-19 lockdowns were reintroduced in much of Europe and investors awaited the US presidential election.

Global equities declined in October. The US presidential election and rising Covid-19 cases in many countries, notably across Europe, were the main focus for investors. Corporate bonds outperformed government bonds.
US shares fell amid rising Covid-19 cases, uncertainty over the presidential election and lack of progress on further fiscal stimulus.
Eurozone shares declined, underperforming other regions, as Covid-19 infections rose sharply and a number of countries reintroduced national lockdown measures.
UK equities fell amid renewed fears around a pick-up in Covid-19 cases. At the very end of the month, the UK government abandoned a tiered system in favour of uniform restrictions across England.
Japanese shares declined, largely due to the renewed uncertainty affecting other global regions. Japan’s success in containing the virus saw it announce measures to encourage consumer spending in restaurants.
Emerging market equities gained due to expectations of additional fiscal stimulus in the US. The prospect of more stable trade relations with the US under a potential Biden presidency also proved beneficial.
In fixed income , the US 10-year yield rose (meaning prices fell) which seemed to reflect rising hopes of economic stimulus. However, European yields fell (i.e. prices rose) as Covid-19 cases increased and lockdowns returned.
Commodities registered a negative return. Energy was the weakest component with crude oil falling sharply on concerns over weaker demand related to the coronavirus.

US equities declined in October, primarily due to the continued rise in Covid-19 cases in many states. Market optimism over additional fiscal stimulus also waxed and waned, contributing to stock market movements. As the deadline for stimulus negotiations drew near, the unpredictability of the 3 November presidential election added to the wider sense of uncertainty. President Trump hinted more than once that stimulus would be announced post the election, should he win a second term.

From an economic perspective, data continued to indicate industrial activity was expanding in both the manufacturing and service sectors. Initial jobless claims also reached their lowest number since March. Even so, the Federal Reserve (Fed) maintained the message that it will keep rates unchanged until inflation stabilises at 2%, and will tolerate a moderate overshoot. Further, the Fed reiterated that additional fiscal stimulus was required.

The utilities sector – a relatively small component of the S&P 500 – was among the strongest performers in October, while the more significant communications sector made modest gains. All other sectors fell to one extent or another, with the technology, energy and healthcare sectors among the weakest areas of the market.

Eurozone

October saw shares fall in the eurozone as several countries reintroduced lockdowns to try and contain rising Covid-19 infection rates. France introduced a strict new national lockdown while partial lockdowns were announced in several other countries including Germany and Belgium. The European Central Bank kept monetary policy unchanged but indicated that more stimulus measures are likely to be announced at the next policy meeting in December.

Data showed that the eurozone economy expanded by 12.7% in the third quarter of 2020 as activity rebounded over the summer. However, this still leaves the economy 4.3% smaller than it was at the same time last year and expectations are that the new lockdowns will weigh on economic activity in the coming months. Indeed, business activity contracted in October according to the Markit composite purchasing managers’ index (PMI) which fell to 49.4. from 50.4 in September. 50 is the level that separates expansion in business activity from contraction. The PMI surveys are based on responses from companies in the manufacturing and services sectors. Annual inflation remained stable at -0.3% in October.

October saw the bulk of Q3 corporate earnings’ releases. These were largely positive, with many companies beating expectations. Nevertheless all sectors ended the month in the red. Information technology was among those seeing the steepest falls. German software company SAP cut its revenue and profit forecasts for the year. The energy sector also fell sharply with lockdowns likely to mean reduced demand for oil. The telecommunication services sector was among the more resilient over the month.

UK equities fell over the period amid renewed fears of a pick-up in Covid-19 cases. Policymakers in Wales and Northern Ireland used devolved powers to implement new countrywide lockdowns, while Scotland introduced a tiered system. At the very end of the month, the UK government abandoned its own tiered system in favour of uniform restrictions across England, to run initially for four weeks from 5 November until 2 December.

In response to these events, the UK government announced it would extend the Coronavirus Job Retention Scheme, or furlough scheme, until December. Employees will receive 80% of their current salary for hours not worked, up to £2,500 a month. This scheme was due to be superseded by the Job Support Scheme (JSS) in November, as part of Chancellor Rishi Sunak’s “Winter Economy Plan”.

Expectations built that the Bank of England (BoE) would use its November policy meeting to extend quantitative easing. It also emerged that the bank’s deputy governor, and CEO of the Prudential Regulation Authority, Sam Woods wrote to UK banks to ask them how ready they might be for negative interest rates.

Japan

The Japanese equity market lost ground for most of October, ending the month 2.8% lower. The yen moved steadily stronger against the US dollar, which had a slight negative impact on sentiment.

Style factors had a smaller influence on overall performance in October, although small cap stocks were weaker than the overall market, reversing some of the sharp outperformance seen in September.

With few new incentives domestically, the primary market drivers came from pre-existing factors, including the global resurgence of Covid-19, the US presidential election, and the likelihood of additional fiscal stimulus in major economies.

Japan’s experience of Covid-19, in terms of incidence and mortality, continues to be markedly different from the US and Europe. As a result, the government has been able to continue to encourage private consumption through its “Go To” campaign for domestic travel. In October, this was supplemented by the launch of “Go To Eat” discounts to support local restaurants in each prefecture. Domestic economic data continues to reflect a slow but steady recovery after a downturn seen earlier in the year that, although severe, was less dramatic then many other countries.

The corporate results season for the June to September quarter started in late October. Initial indications are good, with a significant proportion of companies beating consensus estimates. Although the full picture will not be clear until November, the announcements made so far seem to support further upward revisions to profits across many sectors in the second half of this fiscal year.

Asia (ex Japan)

The MSCI Asia ex Japan Index delivered a positive return in October, comfortably outperforming the MSCI World Index. Nearer month-end, worries about Covid-19 resurfaced as did US election uncertainty. Indonesia was the best-performing index market, as parliament passed the Omnibus Law which incorporates a number of labour market and tax reforms. The Philippines, where Covid-19 related restrictions were eased, and China also delivered strong gains and outperformed the index. Hopes of a Biden win in the US election – and potentially a smoother road forward for US-China relations – were supportive of Chinese equities, as was the performance of its internet companies and a number of positive Q3 earnings surprises.

Taiwan, India and Korea all finished in positive territory but underperformed the index. Earnings forecasts for Taiwan’s companies increased as the outlook for growth improved. In India, the number of daily new cases of Covid-19 continued to fall after the peak in the middle of September. The weakest index market was Singapore followed by Thailand, and Malaysia and Hong Kong SAR also lagged behind.

Emerging markets

Emerging market (EM) equities posted a solid gain as expectations for additional fiscal stimulus in the US increased. It followed a widening of Democratic Party candidate Joe Biden’s lead in opinion polls, ahead of the 3 November election. The MSCI Emerging Markets Index increased in value and outperformed the MSCI World.

Indonesia was the best performing EM market, as the approval of the Omnibus Law boosted sentiment. The Philippines, where Covid-19 restrictions were further eased, Mexico and China were the only other markets to outperform the EM index. In China, strong performance from internet stocks was beneficial. The prospect of more stable trade relations with the US under a prospective Biden presidency also proved supportive for stocks.

By contrast, Poland recorded a negative return and was the weakest market in the index. Daily new cases of Covid-19 accelerated and, later in the month, protests against the government broke out across the country. Greece and Turkey also finished firmly in negative territory and underperformed the index.

Global bonds

Markets were volatile in October, with mixed performance from bonds. Corporate bonds held up well overall. Concerns around Covid-19 were heightened. A resurgence of cases in Europe resulted in renewed lockdowns in Germany and France toward month-end and case numbers remained elevated in the US.

The middle of the month saw a burst of investor optimism as US politicians said negotiations over a stimulus package were progressing. Democrat presidential candidate Joe Biden, who favours a large stimulus, continued to lead in the polls. Sentiment reversed sharply in the last week of the month, on concerns over Covid, with the US dollar gaining against the euro and finishing slightly higher on the month.

Government bonds diverged over the month. The US 10-year Treasury yield rose by 19 basis points (bps) to 0.87%, with the 2-year to 10-year yield curve steepening by 16bps (rising yields mean falling prices). Aside from expectations of stimulus, US data was reasonably positive. Weekly jobless claims fell below 800,000 for the first time since March.

European 10-year yields fell by 10bps across the board amid the continued resurgence of Covid-19. Germany’s 10-year yield finished at -0.63% and France’s at -0.34%. In the “periphery”, Italy’s 10-year yield dropped to 0.76% and Spain’s to 0.13%. The UK 10-year yield was 3bps higher at 0.26%. Economic indicators for Europe and the UK pointed to a loss of momentum, with Europe dipping back into contractionary territory.

Corporate bonds outperformed government bonds. US investment grade debt saw a marginal negative total return (local currency), as yields rose, but was comfortably ahead of US Treasuries. Eurozone investment grade returned 0.8%. Corporate bonds held up relatively well amid the sharp reversal in sentiment in the last week of the month (Source: ICE BofAML).

The performance of emerging market (EM) bonds was mixed. Hard currency (US dollar)-denominated bonds were flat after a late pullback, mainly in high yield, while EM corporate bonds made a modest positive return. Local currency bonds were also moderately positive. EM currencies were again mixed, but slightly higher overall. The Chinese renminbi and Thai baht performed well, while the Turkish lira and Brazilian real weakened.

Convertible bonds proved very resilient versus equities. The Thomson Reuters Global Focus index, which measures balanced convertible bonds, registered a positive return in the falling equity market environment. The index returned 0.4% compared to -2.5% for the MSCI World global equity index. Convertible bond valuations became slightly more expensive, albeit from a low base.

Commodities

Commodities, as measured by the S&P GSCI Index, registered a negative return. Energy was the weakest component with crude oil falling sharply on concerns over demand related to the coronavirus. Livestock and precious metals also lost ground, though they fell by less than the index. Industrial metals rose, aided by strong gains for copper and zinc, and agricultural commodities posted positive returns.

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

Weekly Bulletin: Upgrading Credit

April 6, 2020April 6, 2020Carlton Smith Financial Planning

Unprecedented policy actions to limit the coronavirus shock and sharply lower valuations have improved the outlook for credit, in our view. Major central banks are committed to keep rates low and greatly expand their balance sheets. This underpins demand for corporate bonds and selected sovereign credit. We upgrade our view on global investment grade credit to a moderate overweight from underweight and keep high yield as an overweight.

Key points

Policy & Valuations: We upgrade our tactical views on credit on extraordinary central bank support and substantially more attractive valuations.
Stalling Rally: The initial market rally from historic US policy actions has stalled as worsening economic data and a rising human toll dominate sentiment.
Data Watch: Jobless claims and consumer sentiment data this week are likely to show more signs of economic damage caused by the coronavirus.

The opinions expressed are as of April 2020 and are subject to change at any time due to changes in market or economic conditions. The above descriptions are meant to be illustrative only.

Weekly Bulletin: A Shift to Sustainable Investing

April 1, 2020Carlton Smith Financial Planning

It’s important to keep a long-term perspective amid market volatility – such as the extraordinary moves of recent weeks. One enduring trend we see is a move to sustainable investing: a structural shift in investor preferences leading to large and persistent flows into assets perceived as more resilient to sustainability-related risks such as climate change. Investors rebalancing portfolios after the risk asset selloff may consider leaning into sustainable assets.

Key points

Long-term trend: Investors should keep a long-term perspective amid market volatility, including a focus on portfolio resilience through sustainable investing.
Policy action: Historic US policy actions, including over $2 trillion in fiscal support and a raft of Federal Reserve measures, helped calm markets.
Data watch: This week’s data are likely to show further signs of economic damage caused by the coronavirus outbreak and containment measures.

The opinions expressed are as of March 2020 and are subject to change at any time due to changes in market or economic conditions. The above descriptions are meant to be illustrative only.