At a glance
- Last Thursday’s US Thanksgiving holiday meant market moves were more muted than in recent weeks, but still in line with November’s positive trend. Equities continued their strong run, particularly in the US, which recorded gains for the fourth week in a row. US equities are now close to their summer highs and remain a compelling asset class in the long-term. But, given the high valuations and potential headwinds to growth, we believe surpassing these highs could prove difficult in the near term. So, we own fewer US equities relative to our long-term strategic asset allocation.
- Eurozone equities rose as well. Economic risks here are higher compared to the US, but valuations are less demanding. In all, we own fewer Eurozone equities than normal, too. The UK was the exception across the developed world last week, performing negatively. Emerging market equities failed to outperform their developed market peers despite a slightly weaker US dollar as US Treasury yields rose moderately (while remaining lower than a month ago as we had expected).
- We also saw a moderate rebound in European government bond yields. This was likely due to a relative stabilisation of manufacturing and services activity in the Eurozone, as shown by the purchasing managers’ indices (PMIs). With growth slightly contracting in the third quarter of 2023 (down 0.1%), the November PMIs suggest that the Eurozone is likely in a shallow ‘technical’ recession. It’s a similar story in the UK as gilt yields also rebounded last week – but more strongly – as services activity picked up. This somewhat reduces the probability of a moderate UK recession, but we believe it’s still the most likely outcome.
- The Swedish central bank, the Riksbank, held rates at 4%. Inflation is still well above the 2% target at 6.5% in October, and the central bank wants to avoid a further weakening in the currency. Therefore, despite holding rates, it left the door open for the possibility of another rate increase. That said, an additional rise seems unlikely as economic activity deteriorates and the krona stabilises.
- Turning East, inflation reaccelerated in Japan, driven mainly by the reduced government subsidy for utility bills. The market continues to expect that interest rates will likely rise from the current negative levels at some point in 2024. However, we think the Bank of Japan will likely remove its yield curve control first, which is a policy aimed at keeping bond yields within a given range. The yen and the Nikkei equity index finished the week flat, and manufacturing activity fell, despite resilient services activity.
How we’re positioned in flagship portfolios
- As we approach the end of the year, we are finalising our 2024 Investment Outlook. Our portfolio positioning remains unchanged this week, and we think, by and large, we’re well-positioned for the start of next year.
- Our view that Western interest rates have peaked and will likely not fall until mid-2024 supports our position in high-quality bonds as yields fall. We hold more government bonds relative to our long-term allocation due to the attractive and relatively low-risk return one can achieve from them compared with riskier bonds.
- In equities, we hold slightly fewer equities relative to our long-term allocation. We’re invested mainly in large, high-quality companies across the US and Europe, which are less volatile than the broader market. Given the continued equity rally in November, this equity selection has contributed well to portfolio performance.
What we’re watching
- The minutes from the October monetary policy meeting of the European Central Bank (ECB) revealed that it was concerned about growth in the region, so focus now turns to Thursday’s inflation data. The market expects a further deceleration in headline and core inflation (which strips out volatile components such as food an energy). This could prompt expectations for the ECB to cut interest rates sooner than anticipated. The current expectation is a first cut by June 2024, which seems likely in our opinion.
- In the US, the focus will be on inflation, too, with the personal consumption expenditures price index due on Thursday. This inflation number is expected to have fallen further in October (again, across headline and core figures), which could lower interest rate expectations and bond yields, while weakening the US dollar. The US manufacturing survey (Friday) should continue to show contracting activity.
- The euro and the US dollar are currently in a tug of war as markets adjust their expectations for interest rate cuts in 2024. Given that a mild recession in Europe is already priced in, a further slowdown of the US economy and persistent overvaluation will likely weigh on the dollar. That said, the dollar’s weakness relative to the euro could be limited as the ECB could soon turn its focus from interest rates to growth and cut from around the middle of next year.
Past performance is not a reliable indicator of future returns.
Data as of 24/11/2023. The Yield and P/E figures for stock markets respectively use 12m forward dividends and earnings divided by the index’s last price. For bond markets, the yield to maturity is used.
Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg does not approve or endorse this material or guarantee the accuracy or completeness of any information herein, nor does Bloomberg make any warranty, express or implied, as to the results to be obtained therefrom, and, to the maximum extent allowed by law, Bloomberg shall not have any liability or responsibility for injury or damages arising in connection therewith Note: Past performance is not a reliable indicator of future returns.