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November was another positive month for global equity markets, appreciating 2.6 per cent (as measured by MSCI World Index) and with several markets reaching new all-time highs. Much of this can be attributed to receding fears of a global recession evidenced by the US third quarter GDP posting of 2.1 per cent paired with positive news flow regarding progress on the US-China trade talks.
The US equity market was particularly strong and outperformed most other major markets. US equities increased due to optimism around a trade deal, combined with improving activity and the strength of its technology sector, which has returned 40 per cent this year. At the time of writing, the broad US equity market is on track for its largest annual increase since 2013. The recent earnings season saw US companies reporting broadly flat earnings relative to the third quarter of last year. Although around 80 per cent of companies beat earnings estimates for the quarter, it is important to note that company estimates had been lowered throughout the year.
With the UK general election on 12 December, politics is likely to remain front and centre of investors’ minds.
The UK and European equity markets also provided positive returns in November. Feeding off of the US, investors in these regions were also in a ‘risk-on’ mode, buoyed by some more positive macro readings, for example November’s eurozone manufacturing PMI reading which jumped to 46.9 (45.9 in October), alleviating some concerns about a never-ending slowdown in the sector. The European Central Bank welcomed its new president, Christine Lagarde. Lagarde will have to wait till 12 December for her first policy meeting. In the UK, the spotlight has shifted to the upcoming general election – also on 12 December. So politics is likely to remain front and centre of investors’ minds as the year draws to a close.
While emerging market equities markets got off to an encouraging start, gains from EM equities proved to be short-lived. Sentiment turned negative due to a mixture of economic, political and corporate factors. Plagued with strikes and anti-government protests across the region, in particular, the ongoing protests in Hong Kong will continue to hinder Asia’s economy, along with the slowdown in Chinese growth and the ongoing trade uncertainty.
Against this backdrop, intra-month we initiated a new thematic position in Mail.Ru Group, which is a Russian internet giant with operations in social networks, online gaming and e-commerce. This stock fits across three of our current themes we like: emerging market consumer, video games and online life.
In fixed income markets, yields moved marginally higher. US yields, as indicated by the US 10Y treasury, closed 8bps higher in November. Similar to October, the November close masked the intra-month swing in US rates with a peak to trough differential of roughly 25bps. Rates were initially pressured upwards and peaked at 1.94 per cent only to break trend lower as all indications point to a more dovish, data dependent US Federal Reserve moving forward. European rates were mixed. Using the German 10Y bund as a proxy, EU rates rose by 4.7bps to -0.36 per cent.
In bonds, we continued to raise our duration exposure in our discretionary model portfolios.
The muted price action indicates a European bond market that has little conviction as it continued to weigh concerns regarding domestic issues (Brexit, local elections) with the prospect that we are approaching an economic trough in Europe and a possible ‘Phase 1’ resolution to the trade conflict between the US and China. Corporate bonds outperformed government bonds, with the riskier high yield part of the market performing well, particularly in Europe. In response to this yield increase we continued to raise our duration exposure in our discretionary model portfolios.
Commodities (as measured by the broad Bloomberg Commodity Index) were down by 2.7 per cent for the month of November. This move was mostly driven by precious metals with gold losing 3.2 per cent in November, as the US dollar strengthened and no new significant political issues came to the fore. Oil gained with WTI (+1.8 per cent) and Brent (+3.6 per cent) appreciating. Although it has been a positive move in oil this month, prices are still modest with WTI at USD 55.2 per barrel and Brent at USD 62.4 per barrel.
In currencies, sterling was 1.2 per cent higher against the euro, but unchanged against a broadly stronger US dollar. The US dollar was also by the same degree stronger against the euro.
We remain mostly on the side-lines in equities.
Whilst equities continue climbing a ‘wall of worry’, we remain mostly on the side-lines. Many geopolitical risks remain unresolved and the US-China trade deal has yet to arrive at a favourable conclusion. Political events such as the protests in Hong Kong, but also in the Middle East (Iran, Lebanon, Iraq, Algeria) can have a major impact on markets and yet despite these challenges, investors appear to be discounting weaker data in many sectors and no conclusive progress with the trade talks that would have shook markets just months ago.
It appears that for now, widespread easing by central banks across the globe has instilled enough investor confidence to keep markets marching higher but for how long? All in all we have plenty to occupy our thoughts as we approach the New Year.