GENERAL MARKET OVERVIEW
UK assets reacted positively to Rishi Sunak being appointed leader of the Conservative Party and, by extension, becoming the country’s new prime minister. His fiscally conservative reputation and prior experience as chancellor helped to stabilise gilt yields and in turn interest rate expectations. As a result a number of domestically-focused areas of the market recouped some of their prior losses.
Consumer discretionary sectors of the market outperformed, including housebuilders, travel and leisure companies and high street retailers. More broadly, economically-sensitive sectors enjoyed a recovery, with industrials being another top-performing sector. Energy companies performed well, in line with renewed strength in oil prices. It was due to these trends that UK mid-sized companies outperformed, despite some mixed trading updates from this area of the market.
UK macroeconomic data deteriorated, with the Office for National Statistics confirming that the economy had unexpectedly shrunk by 0.3% in August. Meanwhile, business surveys suggested that this weakness had continued into the autumn. Purchasing manager indices tracking activity levels signify the economy contracted in September and October, adding to fears of imminent recession.
COMMODITIES
A positive performance in the S&P GSCI Index highlighted October, where we say higher energy prices counteract diminished prices for agriculture and metals. While the fall in the price of natural gas perhaps signalled a weaker month for energy, sharp rises in the price for heating oil, gas oil and unleaded gasoline made energy easily the best-performing component of the index.
Directionally within agriculture, October saw modest price gains for sugar, soybeans and corn; whereas cotton and coffee were sharply lower. Within precious metals, silver prices were slightly up and gold was moderately lower. The industrial metals component saw weak prices for zinc and copper, which were partially offset by higher prices for aluminium, lead and nickel.
GLOBAL BONDS
The global bond markets saw a better month in October than the previous month, most notably with the UK as a somewhat surprising outperformer. Elsewhere, US treasuries disappointed, underperforming against other major markets. Better-than-expected labour market data and the Fed’s response to inflationary pressures were the likely drivers.
Back in the UK, the 10-year and 2-year yields – although still high – decreased from September, likely owing to the introduction of Rishi Sunak as new prime minister and No 10’s fiscal U-turn bringing some stability to the markets. Furthermore, the Bank of England ended its gilt purchase programme, which further steadied the markets.
GLOBAL EQUITIES
Three major drivers – political instability in Europe, inflationary concerns in the US and slowing growth in China – continue to heap pressure on markets and are contributing to the ongoing volatility we saw in October.
Globally, we’ve seen managers look at other major and emerging markets outside of the US, particularly European, Japanese and Chinese equities. In Europe and China, low valuations and significant recent declines are creating value opportunities for investors, whilst in Japan, corporates are flush with growing cash balances.
On the horizon, most managers expect negative earnings revisions in the future, which will continue to pile caution onto an already volatile market.
The content provided in this newsletter is for information purposes only and should not be construed as investment advice nor as a recommendation to buy, sell, or hold in any way. Redhat Capital believes the data in this newsletter is accurate. It is a summary and Redhat Capital therefore does not warrant or guarantee that it is accurate or complete. No investment decisions should be made using this content.
