MARKET BACKDROP

Despite having dominated the headlines for the past year, as it stands today, one of the most anticipated recessions ever has yet to materialise. In fact, economic growth, with the exceptions of Germany and Italy, has broadly been positive across the board. That being said, outside the US, recent gains have been much more modest in nature. However, even though there is a risk of stickier inflation, not helped by high wages and recent oil price rises, we believe that we are at least near the end of the monetary tightening phase in the US and Europe, after a protracted period of interest rates rising sharply in the Western world.

We would caution, though, that the impact of higher interest rates has yet to be felt fully, especially if they lead to labour market weakness as companies cut costs. However, economic weakness would then likely put downward pressure on interest rates, a feature markets are already anticipating for mid to late 2024.

EQUITY AND BOND MARKETS

Over Q3, the UK’s battle with inflation meant government bond yields continued to rise, with the yield on UK 10-year bonds touching a level not seen since 2008. Yet, weak business surveys and the better-than-expected inflation figure saw yields falling back. In the US, strong GDP growth lent credence to the narrative that interest rates may need to stay higher for longer, and so the yield on 10-year US government bonds climbed to its highest level since 2007. Outside of government bonds, we have seen some gains, as the more encouraging economic environment has tempted investors into corporate debt markets.

Turning to equities, global stock markets traded quite choppily in the third quarter, with a fairly benign July leading to a more lacklustre August and September. One of the best-performing markets in 2023 has been the US. Although its technology behemoths didn’t gain quite as much favour in the quarter as they did earlier in the year.

The underperformance of medium and smaller-sized companies has also been a prevalent theme in the UK stock market. The third quarter was no exception to this, partly because a higher oil price drove up the share prices of multinational energy companies, such as Shell, which makes up nearly 9% of the FTSE 100. Even so, whilst it has been larger companies that have generally supported the UK market this year, it has still returned less than its major world peers. Performance in Asian and Emerging Market equities also lagged, largely due to disappointing Chinese economic data.

INVESTMENT OUTLOOK

Looking ahead, we remain cautiously optimistic about the markets. While the economic outlook, war in Ukraine and Central Bank policies, amongst many other factors, continue to present challenges, we are confident that our diversified approach will allow us to navigate any future volatility successfully. By continuing to monitor the macro and market environment closely, it is possible to seize any new investment opportunities as and when they arise.

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