For financial professionals only
In a nutshell:
- Budget boosted by stronger than expected economic recovery
- Q4 earnings season off to a strong start
- Increase in bond yields ease, but rate rise risk remains
What’s moving markets…
Inflation remained a big concern for investors in October as energy prices continued to rise.
Oil prices hit highs of over $80 a barrel, levels not seen since 2014. Russia’s President, Vladimir Putin, offered to export record volumes of fuel to Europe to help ease supply shortages and pricing pressures. True to his word, he boosted natural gas shipments to Europe by 15%(1) in October. Despite this, other supply chain issues remained. Renault joined the list of car makers to announce production cutbacks due to worsening global chip shortages, which didn’t help the outlook for car prices.
In response to higher inflation, the Bank of England (BoE) made further hawkish comments about potential interest rate rises. Governor Andrew Bailey warned that unless policy makers acted, higher inflation could prove damaging to the economy. As a result, markets are pricing in a rate rise by the end of this year. However, the Monetary Policy Committee also acknowledges that price gains are likely to moderate next year as supply and demand imbalances correct themselves, which questions whether any rate rises this year would be justified.
The European Central Bank (ECB) provided a more dovish stance insisting that inflation will prove transitory. While the ECB will wind down its bond buying programme in Q1 2022, they’re unlikely to raise rates next year, perhaps for the same reason that some economists believe the price rises will ease in 2022.
In more positive news, UK job vacancies hit a 20 year high according to the ONS, rising from 318,000 from pre-pandemic Q1 2020 levels to currently 1.1 million. Meanwhile, unemployment also fell with data showing 29.2 million now employed, higher than before the pandemic.
This was just the boost the Chancellor, Rishi Sunak, needed ahead of the budget announcement at the end of October. With jobs and economic growth up, and debt not as bad as feared, the Chancellor announced a series of measures to make sure household incomes are not squeezed by rising prices while the UK gears itself up for a post-Covid economy with numerous spending plans including infrastructure.
In other good news, the Q4 earnings season got off to a strong start in October. Looking at the S&P 500 Index, companies were mostly beating earnings estimates according to Factset. The index reported its third highest year-on-year growth in earnings since Q3 2010, with analysts predicting earnings growth of more than 20% for Q4 2021 and above 40% for the full calendar year. Some of this is due to the lower base effects from 2020, but partly due to overall improved earnings growth for 2021 too. As you’ll see in the table below, the US market responded positively to the strong earnings season.
Asset class implications…
Rising inflation and higher interest rate expectations meant bond yields continued to rise for most of October, with 10 year US Treasury yields climbing to over 1.70%. By month end, yields retreated amid strong company earnings reports and investors preparing for the Fed’s next move. Despite this, inflationary concerns and tighter monetary conditions weighed on sentiment. As such, maintaining flexibility within the fixed interest sectors and using managers that can take advantage of opportunities across the full credit spectrum makes sense, particularly within the corporate bond and strategic bond sectors.
With the strong earnings season well underway, it was no surprise the US market made reasonable headway in October following a volatile September. However, this led to concerns that valuations in the S&P 500 were too high. Taking the Shiller CAPE ratio (a cyclically adjusted PE ratio) the S&P 500 was valued at around 38.3x compared to its average of 26.2x since 1990. Analysts have argued this valuation is justified and supported by strong earnings growth. By contrast, the UK market on a forward PE of 12.8x looks extremely cheap(2). There’s a bias towards the domestic UK market in our solutions, making them well placed to benefit from the UK’s continued recovery and attractive valuation.
The FTSE Japan was down by 5% in sterling terms last month. Traditionally, the election of a new Prime Minister results in a stock market rally, but not for new Prime Minister Fumio Kishida. His first policy speech as Prime Minister failed to lay out a specific vision for his ‘new capitalism’, and this didn’t go down well with investors. We’re currently underweight Japan in our Tactical portfolios, so this positioning would have helped during October.
Asset classes in numbers
| Name | 1m | 3m | YTD | 1yr | 3yr |
|---|---|---|---|---|---|
| FTSE Actuaries UK Conventional Gilts All Stocks TR in GB | 2.15 | -2.43 | -5.41 | -4.31 | 10.56 |
| ICE BofA Global Broad Market Hedge GBP TR in GB | -1.88 | 1.15 | -4.98 | -7.57 | 5.80 |
| IA UK Direct Property TR in GB | 0.85 | 2.25 | 5.24 | 5.27 | 1.59 |
| FTSE All Share TR in GB | 1.82 | 3.54 | 15.63 | 35.40 | 17.64 |
| FTSE USA TR in GB | 5.28 | 6.34 | 22.55 | 34.44 | 66.97 |
| FTSE World Europe ex UK GTR in GB | 3.01 | 2.15 | 15.11 | 33.83 | 42.98 |
| FTSE Japan TR in GB | -5.02 | 3.44 | 2.01 | 12.68 | 21.42 |
| FTSE Asia Pacific ex Japan TR in GB | 0.00 | 1.50 | 0.45 | 11.04 | 39.25 |
| FTSE Emerging TR in GB | -0.52 | 2.43 | 1.65 | 10.42 | 33.29 |
Source: FE Analytics, GBP total return (%) to last month end
(1) https://www.bloomberg.com/news/articles/2021-10-13/putin-says-russia-is-ready-to-supply-the-gas-that-europe-needs (13th October 2021)
(2) JPM Guide to Markets Q4 2021 – data as at 30th September 2021
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.
