World Market Summary
October was most notably characterised by a spooked bond market, with the fear gauge soaring as Halloween neared. The cause was a broad-based bond sell-off ahead of the highly anticipated US election and also before and after the UK budget announcement at the end of the month. Whilst budget airline Ryanair announced that flights would have to be axed next year due to Boeing’s delays, there was nothing low-cost or conservative about Rachel Reeve’s Budget announcement.
The Office for Budget Responsibility (OBR) see Reeve’s plans equating to £140bn more spending over the coming five years than March’s budget projections, and this will require a substantial volume of debt issuance for the market to digest. This fiscal stimulus and the minimum wage hikes are likely to be inflationary, which may lead the Bank of England (BoE) to err on the more hawkish side in coming meetings. However, the market had been fearing the worst and, therefore, saw a small relief rally on the back of the announcement. We may see a further reversal of the record £2.7 billion equity fund outflows in October, resulting from investors locking in capital gains ahead of the budget.
Market performance outside of the UK was similarly disappointing with few areas for investors to hide. Despite the political uncertainty after a snap election, Japan’s Nikkei 225 was the only major market to register positive performance in October, with the remaining major equity markets all registering low single-digit losses. The prospect of a sixth consecutive month of gains for the US market was unravelled by a mixed reaction to Magnificent 7 earnings, a substantial rise in bond yields ahead of the US election and a string of weaker economic data. Manufacturing and labour market data were particularly weak, with Nonfarm payrolls registering the lowest level of job growth since the end of 2020.
Elsewhere, European data remains very sluggish, albeit with some signs of troughing. Peripheral regions, and most notably Spain, continue to provide a pocket of strength. However, the current economic weakness was typified by Volkswagen announced closure of multiple factories in Germany alongside mass layoffs. ‘The sick man of Europe’ continues to be the nickname of choice for the largest economy on the continent, with China’s weakness continuing to exacerbate its own. The US election is naturally the headline act in November, but we will also be watching China’s congressional meeting which follows just days after. A $1.4 trillion fiscal package is being weighed up and China’s economy and stock market will see a boost should the government decide to go ahead with the plans.
United Kingdom
UK stock and bond markets unsurprisingly sold off in October as fears over the pending autumn Budget mounted and some investors took profits ahead of expected rises in CGT. Indeed, October was the fourth worst month for equity market outflows on record. This left the FTSE 100 down 1.45% and the FTSE 250 down nearly 3%.
The Budget laid out by the labour party sees an additional £40 billion of day-to-day spending funded by an increase in taxation, of which the majority will be borne by employers in the form of higher national insurance contributions. The rules on how the UK account for debt has also been tweaked to free up room for spending. Despite the Budget, the percentage of spend on growth in the UK still lags a number of other developed countries and the private sector will have to come to the fore if the UK is to achieve its much needed increase in growth and productivity. Nonetheless, this budget is a step in the right direction.
The Budget ended up better than initially feared, and markets rallied on the back of the announcement. The Alternative Investment Market (AIM), which had been the market down the most, was up sharply on the back of the news that Business Relief tax has been reduced to 50% of the normal inheritance tax rate and not scrapped entirely as market participants had been expecting.
We would expect the performance of markets to improve in the coming months as there number of areas such as the AIM market where our analysis points to pent up demand and funds ready to be invested in the market. UK company valuations remain cheap, we now have improved political stability relative to a number of peers and earnings are set to inflect over the coming 12 months, particularly in small and mid-caps.
The economy returned to growth with Gross Domestic Product (GDP) coming in ahead of expectations at 0.2%, inflation is now comfortably below target at 1.7% and wages continue to come down and are moving in the right direction. Purchasing Managers Index (PMI) did move lower; however, we suspect there was a bit of “wait and see” from businesses prior to the budget. So all in all, it was another encouraging month in the UK economy.
For more in depth analysis on the budget and what it means for your finances, please reach out to your contact at WH Ireland and we will be happy to help.
United States
October has been choppy for the US markets, with the Dow down 1.3%, the S&P 500 off by 1%, and the Nasdaq losing 0.8% in US dollar terms. This is largely a response to the mixed bag of Q3 earnings and profit-taking in extended equities, particularly within the tech sector. Despite the excitement around AI, the reality is that these companies are struggling to meet the growth expectations built into their current valuations. As the race has shifted in Trump’s favour, US yields have risen, steepening the yield curve and widening inflation breakevens. As a result, the dollar has gained traction in Foreign Exchange (FX) markets, reflecting a broader sentiment shift.
Meanwhile, the US economy continues to demonstrate resilience. Q3 GDP has shown steady growth, and personal consumption trends reflect robust consumer activity. However, job creation slowed much more than anticipated due to strikes and distortions related to hurricanes, though the unemployment rate remains unchanged at 4.1%. As we look ahead, a rate cut to 4.5% seems likely, with further reductions possible in December. Regardless of the election outcome, fiscal policy is expected to continue with deficit spending, potentially leading to a steepening yield curve as investors seek greater term premium compensation for holding longer-dated debt.
Europe
European equity market performance was in line with developed markets peers, with the MSCI Europe ex UK index down just shy of 2% in October. Italy and Spain continued their divergence from the rest of the region up 2.22% and 0.2% respectively.
As mentioned above, the European economy at the headline level remains weak although improved in the month. Inflation came in at 1.7% and the European Central Bank (ECB) delivered a 0.25% interest rate cut. The ZEW indicator of economic sentiment hit the highest level since July, buoyed by improvements in the inflation picture and on expectations for future interest rate cuts. Industrial production also came in higher than expected while retail sales missed but were still positive.
Germany and France continue to drag down the region, whilst some of the Southern regions have continued their strong performance. We maintain the view that Europe in aggregate are further through their slowdown than other major developed economies. We therefore believe moderating inflation and continuing rate cuts sets the union up well moving into 2025.
Asia and Emerging Markets
Emerging Market assets concluded what has been a turbulent month with rising global yields, a strengthening dollar and investors looking to replace their risk assets prior to the US election. Mainland China and Hong Kong’s performance against US equities has been impressive in recent months as Emerging Markets ex Japan are up over double digits in terms of outperformance, with the Hang Seng up 10% and the Shenzhen up more than 25% since the end of August. The main news out of China were rumours that the National People’s Congress will approve the equivalent of $1.4 trillion of fiscal stimulus, equivalent to 8% GDP via special bond issuance. Whilst the plans are not finalised, and are subsequent to change depending on the outcome of the US election, the stimulus should be impactful in aiming to address local government hidden debts. On the whole, the Chinese economy remains turbulent with GDP growth coming in marginally ahead of expectations but expanding at the slowest rate since Q1 2023. Furthermore, the National Bureau of Standards Manufacturing PMI and the House Price Index came in below expectations whilst retail sales and Industrial production both came in slightly stronger than expected. Looking ahead, the US election and the potential implications of tariffs and the renewed risk of a trade war are key risks to an already unsteady Chinese economy.
In Japan, last week’s election saw the new Prime Minister Ishiba and the Liberal Democratic Party coalition lose their majority. To contextualise, apart from three brief years following the Lehman crisis, the Liberal Democratic Party (LDP) has led Japan for seven decades. Prior to the election the market had been discounting for uncertainty however contrary to sell side publications predicting a large sell-off, the market rallied following the results as the yen weakened thus favouring exporters. Notably, Prime Minister Ishiba had been a proponent of more hawkish monetary policy and tighter fiscal responsibility. With his political power now somewhat compromised the market looks to be pricing in a greater possibility of a more expansionary and market friendly policy.
Fixed Income
The correlation between stocks and bonds ominously turned positive once again, with fixed income performance particularly poor given the extent of yield moves associated with the US election and the UK budget. The UK 10-year surpassed 4.5%, hitting the highest level in 12 months as investors priced in the greater issuance and inflation that is likely to result from Rachel Reeve’s spending plans. We believe gilts represent good relative value at this juncture with 10-year treasuries offering closer to 4.3% despite a more precarious deficit and the potential for an inflation surge should Trump be in a position to enact his policies. The Federal Reserve will likely still proceed with a 0.25% cut in November given the weakening data, but the economy is ultimately still holding up well and the potential for a resurgence in inflation will likely quell any major monetary easing in meetings thereafter.
In credit markets, spreads remained tight over the month, with the market continuing to focus on the healthy corporate balance sheets rather than geopolitical concerns. However, corporate credit struggled given that interest rates drove performance over the month. Short duration high-quality corporate bonds outperformed again given the lower sensitivity to yield moves.
The dollar strengthened as the market became increasingly convinced that Trump will win the election, whilst sterling weakened with investors displaying their discontent over the budget announcement.
Alternatives
Oil prices had a flat month, moving lower in response to Israel’s decision not to strike Iran’s nuclear facilities. This easing of geopolitical tensions coincided with an increase in the Organization of the Petroleum Exporting Countries’ (OPEC) output as Libya restored its oil production following a brief political crisis. However, looking ahead, oil prices are expected to rise from current lows due to ongoing geopolitical risks, a potential delay in OPEC’s planned output hikes for December, and signs of recovery in China’s manufacturing sector as stimulus measures take effect.
Gold prices saw an upward trajectory despite a strengthening dollar and rising Treasury yields, driven by robust demand as investors sought a hedge against inflation and a safe haven amid electoral uncertainties. Gold registered a 3.5% gain for the month, while silver outperformed with a 4.4% increase. The momentum for precious metals is likely to persist, bolstered by lingering tensions in the Middle East. The upcoming US election will likely be a ‘net positive’ for gold, regardless of the outcome. A Republican win might initially strengthen the dollar and pressure gold; however, if inflationary concerns or trade tensions escalate, it could ultimately support gold prices.
Property
The Nationwide House Price Index in the UK increased by 2.4% year on year in October marking a slight easing from the 3.2% increase in September and below the expected 2.8% rise. Nonetheless, this marked the eighth consecutive period of rising house prices. Robert Gardiner, the Chief Economist at Nationwide commented on how resilient the housing market had been of late with mortgage approvals nearing pre-pandemic highs despite higher interest rates. The combination of strong labour market conditions combined with low unemployment and rising incomes have supported steady activity and house price increases this year. If the economy continues to recover at a decent rate, the housing market should continue to strengthen as lower interest rates and fast income growth steadily improves affordability. Furthermore, the Royal Institute of Chartered Surveyors (RICS) UK Market survey house price balance measuring the gap between the percentage of respondents seeing rises and falls in house prices jumped to +11% in September illustrating an increasingly positive outlook for the housing market and exceeding forecasts of +4%.
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Important Information
All Index data figures are sourced by Morningstar and correct as at 31 October 2024, unless otherwise stated.
The value of investments or any income arising from them may fluctuate and are not guaranteed. Past performance is not necessarily a guide to future performance.