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What's moving markets
Markets were generally buoyed in November by the news that US CPI was lower than expected, with the headline rate at 7.7% for the 12 months ending October - the lowest since January. Bond yields fell (so capital values rose) with improved prospects of future rate hikes by the Fed being scaled back. Chair Jerome Powell has since signalled that the Fed will slow the pace of December’s interest rate rise with expectations of a 50bps rise instead of 75bps. However, he’s also made clear that borrowing costs will continue to rise to combat the sticky inflation.
On the political front, the US mid-term elections were better than expected for the Democrats. They held onto the Senate but lost control of the House of Representatives. Although the Republican majority was smaller than expected it means they can block Biden’s agenda, so likely frustrations lie ahead.
Meanwhile, inflation figures for the UK showed no let up, hitting 11.1% in the 12 months to October – a 41 year high. This was largely driven by food prices which have been affected by higher energy and transport costs. As a result, the Bank of England delivered its biggest interest rate rise in 33 years of 75bps. With rates now at 3%, this will have knock on effects on those with mortgages, credit card debt and loans.
To top it off, the Chancellor’s Autumn statement aimed to balance public finances with £55bn of tax hikes and spending cuts. The tax burden on the British as a percentage of GDP is set to reach the highest level since World War II, so we’re facing austere times. Q3 GDP figures showed the UK economy contracting by 0.2% as soaring prices hit households and businesses.
Another important event during the month was COP27, a conference that brings together many nations and provides a framework on climate change. After two weeks (and two days) of negotiations on various issues, one of the key takeaways was the historic deal on loss and damage. This deal aims to provide new funding by the developed nations to assist developing countries on the adverse effects of climate change. Much of the detail still needs defining, but it was an important agreement which developing countries have asked for more than 30 years.
Asset class implications
Both government bonds and corporate bonds delivered a positive return in November on brighter inflation news from the US. Expectations are now of lower rate hikes, with the possibility of interest rate falls in the future, an environment in which fixed interest assets could thrive. It might be too early to say we’ve turned a corner as tensions over US/China, China/Taiwan, and the Ukraine/Russia war still pose a risk to inflation. We can’t rule out further volatility, but at least there was some relief for fixed interest after a rocky year.
All major equity markets were in positive territory over the month, in sterling terms, although the FTSE USA delivered the weakest relative return of 1.89%. A lot of this is down to currency. The dollar weakened in November, so when measured in dollar terms the FTSE USA was up by
5.39%.
Asia and Emerging markets also delivered a much-needed recovery, posting double digit returns. Rising Covid cases in China complicated its path to re-opening its economy again. Protests against Covid restrictions sparked market jitters, but officials have since allowed people to isolate at home - a significant shift in stance. China has also said it will increase vaccination efforts among its older population which bolstered markets. The FTSE China Index ended the month up 24.66%. Despite the market recovery, its economic activity fell in November, so if weaker growth persists, its central bank may need to increase its stimulus.
Property, one of the stronger asset classes this year, has shown weakness recently and was down -1.93% in November. There is typically a lag between rising interest rates and their impact on property transactions and this is what we’re seeing now. Property valuers are being more cautious of the outlook because of higher interest rates. The rise of gilt yields this year has also reduced the relative attractiveness of property income and that could affect demand, hence the softening in the asset class. This is to be expected and not a huge concern at this stage.
Want to hear more?
Investment Manager Colin Morris discussed the markets in November with Patrick Ingram in the latest episode of our Let's Talk investing podcast. Listen now ➜
| Name | 1m | 3m | YTD | 1yr | 3yr |
|---|---|---|---|---|---|
| FTSE Actuaries UK Conventional Gilts All Stocks TR in GB | 2.82 | -2.50 | -20.59 | -22.69 | -19.54 |
| ICE BofA Global Broad Market Hedge GBP TR in GB | 0.51 | -4.41 | -6.38 | -8.82 | -7.32 |
| IA UK Direct Property TR in GB | -1.93 | -8.84 | -4.58 | -2.83 | 0.06 |
| FTSE All Share TR in GB | 7.14 | 3.98 | 1.78 | 6.54 | 12.22 |
| FTSE USA TR in GB | 1.89 | 0.80 | -2.98 | -1.42 | 44.83 |
| FTSE World Europe ex UK GTR in GB | 8.00 | 7.17 | -6.40 | -2.88 | 20.64 |
| FTSE Japan TR in GB | 5.94 | -1.17 | -4.78 | -5.14 | 7.33 |
| FTSE Asia Pacific ex Japan TR in GB | 12.98 | -3.80 | -4.93 | -5.01 | 16.35 |
| FTSE Emerging TR in GB | 10.24 | -4.41 | -5.11 | -5.78 | 11.32 |
Source: FE Analytics, GBP total return (%) to last month end
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