Market Opinion - November 2022

Market Opinion - November 2022

In November, global equity markets experienced positive performance across all regions. Despite ongoing high inflation concerns, positive inflation data from the US and the Eurozone provided a boost and raised hopes of central banks easing their interest rate hike plans. Emerging markets outperformed developed markets during this period.

Europe saw another month of gains in equity markets, driven by a more positive outlook on the recession and favourable factors such as lower gas prices and mild autumn weather. All sectors ended the month with positive returns. Eurozone inflation fell for the first time in 17 months, surpassing consensus estimates. Although still high at 10%, this decline raised hopes that inflation may have peaked and could lead to a more moderate approach to interest rate hikes by the European Central Bank (ECB). The flash purchasing managers' composite index (PMI) showed improvement, rising by 0.5% in November, although it remained below the 50 level, indicating contraction in business activity.

In the UK, equities rebounded despite indications of an ongoing recession. GDP contracted by 0.6% between August and September, signaling a decline in the economy during the third quarter. Inflation reached its highest level in over 40 years, reaching 11.1% in October, driven by food and energy prices. This has increased pressure on the Bank of England to raise interest rates further. Retail sales in October exceeded expectations due to an additional bank holiday, but overall sales remained below pre-pandemic levels. Unemployment slightly increased in the three months leading up to September, and it was projected to reach 4.9% by the end of 2023.

US equity markets recorded back-to-back monthly gains in November, supported by positive inflation data, indications of a less aggressive approach to interest rate hikes, and easing geopolitical tensions with China. The midterm election results favored the Republicans, who gained enough seats to hold a majority in the upcoming 118th congress, while the Democrats maintained control of the Senate. Historically, a split government has been positive for stocks.

Asian markets rebounded strongly in November, led by China, Hong Kong, and Taiwan. China's real estate sector performed well following the announcement of new support measures. Easing tensions between the US and China after a meeting between their presidents also provided relief. Taiwan experienced a recovery in its markets and currency, with the currency rising 4.7% against the US dollar after several months of decline. Indian, Australian, and Japanese equity markets also advanced due to positive inflation data from the US and expectations of a slowdown in interest rate hikes by the Federal Reserve.

Emerging markets had their strongest month since May 2009, outperforming developed markets in November. Positive US inflation data and the expected easing of China's COVID-19 policies contributed to this performance. EM Asia led the way, followed by EM Europe, Middle East, and Africa (EMEA), while EM Latin America was the only region with negative returns. Turkey and South Africa were the top performers in Europe, and the CE3 countries (Poland, Hungary, and the Czech Republic) rebounded strongly after months of underperformance.

In the fixed income market, bonds benefited from positive US inflation data and the anticipation of a slowdown in the Federal Reserve's interest rate hikes. The two-year US treasury bond, sensitive to interest rate changes, experienced its largest drop since 2008 as investors adjusted their expectations. Corporate bond markets, both investment-grade and high-yield, gained, and indexes for sterling, euro, and US corporate bonds increased.

In the realm of Environmental, Social, and Governance (ESG) news, the Conference of the Parties (COP27) held in Sharm-El-Sheikh was a focal point. The conference resulted in renewed commitments to limit global warming temperature increases to 1.5°C. Additionally, a deal was struck on loss and damage, leading to the establishment of a fund by developed countries to assist poorer nations affected by climate change. Looking ahead, the COP15 biodiversity conference in Montreal aims to mobilize financing for nature-based solutions, and a 10-point plan has been devised for this purpose.

Overall, European shares performed well in November, supported by positive economic data indicating a milder recession in the eurozone than initially anticipated. Retail spending remained robust, economic sentiment improved, and inflation showed signs of easing. The German Ifo business climate index also reflected a more positive outlook, suggesting that the expected recession in the eurozone might not be as severe as previously predicted.

The UK equity market rebounded despite indications of the country's economy entering a recession. The Office for Budget Responsibility projected a 1.4% contraction for the next year, accompanied by a significant decline in living standards. The Chancellor, Jeremy Hunt, announced spending cuts and tax increases in the Autumn Statement to reassure the markets about the UK's fiscal prudence. UK inflation rose to 11.1%, driven by higher energy and food prices, reaching its highest level in 41 years. The Bank of England responded by raising interest rates by 0.75 percentage points to 3.0% in an attempt to curb inflation.

The US equity market experienced gains across all major indices. Positive inflation data, signs of a slower pace of interest rate hikes, and improved US-China relations contributed to the positive investor sentiment. The Federal Reserve's interest rate hike of 75 basis points at the Federal Open Market Committee meeting initially unsettled the markets, but the subsequent release of lower-than-expected CPI inflation data eased concerns. Federal Reserve Chair Powell's comments about moderating the pace of rate increases further boosted equity markets. The outcome of the midterm elections, with a split government, provided stability and was seen as favourable for stocks.

Asian equity markets rebounded strongly, with China, Hong Kong, and Taiwan leading the way. China's equities benefited from early policy responses by Beijing, including measures to support the volatile property market. Easing US-China relations following the Biden-Xi Jinping meeting in Bali also contributed to the positive performance. However, macroeconomic data highlighted slowing domestic demand and a weak housing market in Asia.

Emerging market (EM) equities had their strongest month since 2009, outperforming developed markets. EM Asia, particularly China and Taiwan, experienced significant gains due to positive policy responses, semiconductor rebound, and easing US-China relations. EM EMEA, including Turkey and South Africa, also saw increased market value, while Latin America posted negative returns, except for Brazil.

Bond markets delivered broad gains in November, driven by positive US inflation data and expectations of a slower pace of interest rate hikes by the Federal Reserve. US treasuries and European government bonds recorded positive returns. The UK's Autumn Statement resulted in downward revisions of gilt sales, but concerns remained about high inflation levels in the country. Corporate bond markets also experienced gains, with both investment-grade and high-yield bonds performing well.

In the ESG (Environmental, Social, and Governance) space, the COP27 conference concluded with a resolution to limit global warming to 1.5°C. A fund was established to compensate developing countries for loss and damage caused by climate change, and efforts were made to address the interlinkage of climate change and biodiversity loss. Financing for nature-based solutions and initiatives related to water, oceans, forests, and agriculture were emphasized. Additionally, a strategic alliance on rainforests was announced by Brazil, Indonesia, and the Democratic Republic of Congo. The launch of "FAST" aimed to increase climate finance contributions for agriculture and food systems.