Wesleyan’s Director of Investments, Martin Lawrence, looks back at the key themes that have taken centre stage in financial markets in October. Could interest rates finally have peaked and what effect has the crisis in the Middle East had on markets? Martin provides a view, along with an outlook for our funds.
Investment markets were further unsettled in October by the onset of the conflict in Gaza, resulting in stock markets falling up to 4% during the month, but our thoughts, first and foremost, are with anyone who has been affected by the conflict.
Despite some investors seeking safer havens within financial markets, bond markets also fell around 1% in October but there were other factors influencing them - notably the outlook for US interest rates which currently look set to remain in a range of 5.25%-5.5% until the middle of 2024.
Markets remain sensitive to geopolitical events
The price of oil fell 8% in the month, but much of that was a reversal of a 10% rise that had occurred in September. Nonetheless, there are concerns that the oil price could rise substantially higher again if the Israel-Gaza war begins to impact the wider Middle East region and the big oil producing hubs such as Saudi Arabia and Iran. If we are looking for an obvious parallel to draw upon, we all remember only too well the impact that the ongoing Russian invasion of Ukraine had on the price of oil (and gas) last year and the considerable rise in the energy price cap.
Back to present times, some optimism briefly returned to markets at the end of the month as they breathed a sigh of relief that the Israeli ground offensive into Gaza was proceeding a little more cautiously than had been feared. The talk of a 'long war' with Hamas remained the primary concern for stock markets as October came to a close.
With markets already nervous from the geopolitical risks described here, they were in no mood to tolerate disappointing results at the start of the third-quarter corporate reporting season. It was noticeable that any company announcing any form of bad news saw their share price fall, such as UK banks Barclays, and NatWest Group, and French payments company, Worldline.
Interest rates continue to dominate the landscape
Other news in the month saw the US Government narrowly avoid a shutdown in a last minute deal that led to the appointment of a new House Speaker (following weeks of turmoil) with decisions on spending still needing to be addressed. Staying in the US, we saw interest rates approaching their likely peak following a steep rise, reflected in the US Treasury Bond market where long-term interest rates (10-year and 30-year bond yields) rose above 5% for the first time since the global financial crisis of 2008. This 'peak rate' debate was not confined to the US though, with 30-year UK government bond interest rates also rising to 5%, and 10-year German interest rates touching 3% for first time since 2011.
The prospect of an end to relentless increases in interest rates by central banks, is not only good news for us all, but potentially, good news for financial markets too. The US Federal Reserve didn't meet in October, but minutes taken at their September meeting suggested they would proceed more cautiously with interest rates now that US inflation is down to 4%, and with financial conditions already tight enough to cool things down even further.
Here in the UK, despite the Nationwide Building Society reporting a surprise rise in house prices in October (with the average UK house purchase at just over £259,000), the trend remains 'downwards' based on weak mortgage lending statistics and low levels of mortgage application approvals. It is better news on food price inflation for us all though, where it was pleasing to see that annual price increases have fallen back below 10%, combined with a step down in household energy bills – all of which should bring overall CPI (Consumer Price Index) inflation down to around 5% when October figures are published in mid-November.
In Europe, economies continued to gently weaken in October, with provisional data suggesting headline inflation could be below 3% and core inflation just above 4%. Initial readings for quarter three GDP (Gross Domestic Product) growth suggested that Europe went slightly backwards economically and could fall into recession by the end of the year. Regardless, the economic outlook and tighter financial conditions alluded to in the bond markets allowed the European Central Bank to ‘hold off’ on further interest rate increases in October.
What this means for our funds and outlook for November
With longer term interest rates potentially starting to peak in the US, UK and Europe, our Fund Managers continue to take advantage of the good returns available from government bonds, where there is an ample supply of longer-dated bonds available for us to buy.
Corporate bonds (company debt) tend to be shorter dated and so we have purchased far fewer of these in October. I have said in previous updates, that adjusting to higher interest rates has been painful for many investors, and it is not exclusive to Wesleyan. We continue to take great encouragement from the improved returns we are now able to lock in further down the line which could potentially benefit our funds.
The value of investments can go down as well as up and you may get back less than you invest.
This update is for information purposes only and should not be considered as a recommendation, or investment advice. You should not use or rely on this document in making any investment decision.