Market Opinion - October 2022

Market Opinion - October 2022

In October, global equity markets experienced a mix of results. European markets rallied, with all sectors finishing the month in positive territory. The European Central Bank raised interest rates to 1.5%, the highest level since 2009, in response to high inflation. Economists expect the eurozone to enter a recession in early 2023 due to rising living costs and energy prices impacting household spending.

UK markets recovered despite political turbulence, as Rishi Sunak replaced Liz Truss as Prime Minister. Inflation was driven up by high food prices, leading to a decrease in retail spending. Unemployment reached its lowest level since 1974, but employment rates and job vacancies experienced slight declines.

US equity markets rallied strongly in October, driven by a better-than-expected quarter three earnings season. Inflation remained above consensus estimates, prompting expectations of further interest rate hikes by the Federal Reserve. While most businesses on major indices beat earnings estimates, large US technology stocks faced challenges, with Alphabet and Meta reporting losses, and Microsoft and Amazon experiencing slow growth.

Asian equities had a challenging month, particularly due to underperforming Chinese stocks following the Communist Party Congress. Worsening COVID-19 conditions, US restrictions on semiconductor sales, and geopolitical tensions also contributed to the decline. However, quarter three GDP exceeded consensus estimates. Japanese and Korean stocks rebounded, while Taiwanese stocks struggled.

Emerging markets were impacted by the underperformance of Chinese stocks, resulting in a decline for the month. EM Europe, Middle East, and Africa (EMEA) ended the month positively, with the CE3 countries bouncing back and Turkey and Greece enjoying double-digit returns. In EM Latin America, Brazil and Mexico performed well, driven by political and economic factors.

UK fixed income markets improved in October, with sterling-denominated assets and UK gilts seeing positive returns. In the eurozone and the US, expectations of further interest rate hikes led to struggles for US treasuries and German bunds. The ESG sector focused on supporting the EU economy and seeking transparency in investment decisions.

Overall, European markets ended higher despite inflation and economic slowdown concerns. The ECB's interest rate hike and high inflation levels were noteworthy, while GDP growth in the eurozone slowed. The PMI suggested contraction in eurozone businesses, contributing to recession fears in the fourth quarter.

The UK equity market closed higher as positive earnings reports outweighed concerns about an economic slowdown. Rishi Sunak became the new Prime Minister after Liz Truss resigned, and he emphasized economic stability while warning of tough decisions ahead. The new Chancellor, Jeremy Hunt, reversed most of the tax cuts announced earlier and focused on reducing debt. Gilt yields fell back to pre-tax cut levels, and the pound rose.

UK inflation increased to 10.1% in September, driven by high food prices, and it is the second time this year it has risen above 10%. UK unemployment fell to 3.5%, the lowest level since 1974, but the employment rate dropped for the first time since the economy reopened post-Covid. Public sector borrowing increased to £20bn in September.

In the US, equities rebounded, with the S&P 500 companies beating earnings estimates. The Dow Jones Industrial Average index had its best monthly gain since 1976, driven by value equities. The NASDAQ composite, with its technology-heavy stocks, rallied at a slower pace due to the impact of higher interest rates.

US inflation remained above target, leading to expectations of more interest rate hikes from the Federal Reserve. However, some officials considered slowing the pace of monetary tightening to avoid a sharp economic contraction. The Organisation of the Petroleum Exporting Countries' production cuts raised concerns about consumer prices.

Several large US technology stocks reported disappointing earnings, including Alphabet, Meta, Microsoft, and Amazon. Apple's results were mixed, and companies with exposure to China, such as Tesla and Starbucks, were also impacted.

Asian equities fell, particularly in China, due to worsening Covid-19 conditions, geopolitical tension, and post-Party Congress concerns. The 20th Party Congress did not bring significant changes to China's economic ambitions and policies. Positive news included better-than-expected GDP growth and the resumption of travel permits in Macau. Taiwan's equities declined, while Korea rebounded with a stabilizing foreign exchange market.

Indian stocks rose modestly despite lackluster macroeconomic data. EM Asia underperformed due to declines in China and Taiwan. EM EMEA equities rose, with Turkey leading the way. European short-term gas prices dropped, and Latin America saw political developments in Brazil with Lula's victory in the presidential election.

In the UK, the turmoil following the mini-budget subsided as the government reversed fiscal plans. UK gilts had their best monthly performance since January 2020. Inflation and interest rate concerns persisted in the US and the eurozone, leading to declines in US treasuries and German bunds. Expectations of a Fed pivot faded after strong core inflation data. In the eurozone, debate intensified over interest rate levels amid a potential recession.

UK bond markets performed well, with sterling credit registering gains, while high yield credit also saw widespread gains. The energy crisis in Europe prompted discussions on managing gas prices, but no explicit price cap has been agreed upon. Resentment is growing within the EU, and pressure for an EU-wide solution is mounting.

ESG considerations continued to be important in the real estate sector, both from a regulatory and investment perspective.