November Investment Summary
China was the place to be in November (Covid-19 not withstanding) as the equity markets soared on hints of a change in the Chinese zero-Covid policy and in anticipation of a possible economic boost from the reopening of the economy. The Hang Seng index rose over 27% for dollar-based investors and the Shanghai Composite had a healthy gain of 12.2%. If you couldn’t make it to China, staying in Europe was also fine as the EuroStoxx 50 returned nearly 14.5%, and the FTSE100 rose 11.5%. Japan managed a return of just over 8% for the month, while the US was the laggard with the S&P 500 posting a 5.6% gain and the Nasdaq just over 4.5%.
The British pound sterling also staged a fierce rally during the month, which somewhat crimped returns for sterling-based investors in foreign markets, but you would still have made high single digits in most markets and mid-twenties percentage returns in Hong Kong!
These moves were prompted by data from the US that suggested inflation had peaked (or was peaking) and that the US Federal Reserve (Fed) would soon be slowing the pace of interest rate hikes and possibly even halting them in early 2023, with rate cuts to come later in the year. Fed speakers certainly hinted that they would be slowing the size of upcoming rate hikes as did the Fed Chairman, Jerome Powell, in a press conference at the beginning of the month even before we received the better-than-expected inflation data. Financial markets viewed a Fed that will be hiking in increments of 25 or 50 basis points, as much friendlier than the one they have seen hike by 75 basis points at four consecutive meetings.
The UK also managed to regain credibility as the new Prime Minister, Rishi Sunak, and new Chancellor of the Exchequer, Jeremy Hunt, cancelled the previous Prime Minister and Chancellor’s expansionary fiscal plans. Yields on UK government debt fell, and pound sterling recovered sharply after flirting with near parity to the US dollar. Further announcements by the new Chancellor of tax hikes and spending reductions added to financial markets’ relief. The Bank of England announced their support for these moves and suggested this would help in the fight against inflation hinting they might not have to raise rates as high as the markets had previously priced.
Now then is this all clear for risk assets? Are the markets correct that the Fed will soon stop hiking and possibly even reduce rates later next year? We are not yet convinced of that.
We do acknowledge that a Federal Reserve that is hiking in smaller increments, and possibly even pausing, will take a great deal of stress out of the markets. It will slow (or possibly reverse) the dollar’s relentless strength. However, inflation remains exceptionally high and Chairman Powell’s latest speech at the end of November suggested rates would still have to go high and stay high for some time in order to bring inflation back to target. There has yet been no slowing in the US labour market and recent data on wages surprised to the upside. There is more work to be done on fighting inflation. When the market realises that the Fed is not going to be easing policy any time soon there will be a further adjustment to valuations of risk assets. Some, if not all, of the recent bond and equity rallies will be reversed. The markets will scramble to identify firms and assets that can survive and even thrive in a world where cash yields over 4%. This is a very different environment to one we have lived through over the past decade, where zero ,or even negative, interest rates and massive central bank buying of financial assets were considered normal.
Volatility will be higher and investors return expectations will have to be lowered. December is the month we will see the final monetary policy meetings of the year for the Bank of England, European Central Bank and the US Federal Reserve and one more US CPI figure. We suspect the rhetoric and policy moves from these meetings will point to still challenging markets in the year ahead.
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