Wesleyan’s Director of Investments, Martin Lawrence, looks back at the key themes that have taken centre stage in financial markets in November. Despite global stock markets recovering in the month, will central banks remain guarded as a new year beckons?
Markets recovered in November on a combination of expectations that we've reached the summit for global interest rates, and the relief that a temporary ceasefire in the Israel/Hamas conflict brought fresh hope that a solution could be found.
It was pleasing to see that global stock markets returned 5% for UK-based investors in November. The prospect of an end to the (financial market) pain of higher interest rates was further boosted in November by the possibility that interest rates could start to be reduced in 2024, for key markets such as the US, Europe and even here in the UK. This would, no doubt, bring much needed respite to those mortgage holders who will be coming off fixed-rate deals next year, and also for those looking to apply for a mortgage in the future.
The UK government bond market (gilts) returned nearly 3% in November – which is a welcome relief following a sustained period of negative returns for this asset class which has long been viewed as a traditionally safer option, and better news for customer in our lower to moderate risk funds.
Central banks continue to keep a close eye on interest rates
The 'higher-for-longer' (interest rate) message from the Bank of England was becoming well entrenched within the media, but recent inflation readings have given hope that the 'monetary-policy-medicine' (of a prolonged 'dose' of high interest rates) may finally be starting to work.
Speeches from central bankers, such as Jerome Powell (from the US Federal Reserve) and Andrew Bailey (from the Bank of England), continue to stress that further interest rate increases are still possible and that such decisions are 'data dependent'. But recent data does not appear to warrant such action. Part of central banks’ nervousness may stem from underestimating inflation previously, when, at the time, they suggested that the initial inflation rises in late 2021 and early 2022 were merely 'transitory' (which proved incorrect). Continuing to 'talk tough' on interest rates (for the time being at least) is one way that central banks can ensure that inflation doesn't slip out of their grasp for a second time.
A global interest rates’ view
The change of heart on interest rates was fuelled by a variety of economic data releases in November, pointing to a gently weakening global economy. The US jobs market, for example, had been a source of strength, but the employment picture was a little weaker in November as job creation slowed. US industrial production data also painted a similar picture of a gentle slowdown. Fears of a hard (economic) landing still looked misplaced though, as retail sales continue to look healthy - suggesting that US consumer spending continues to be strong, for the time being at least.
At the beginning of November, the Fed again chose to keep US interest rates on hold (unchanged since July) and would have been encouraged to see US headline inflation for October drop to 3.2%.
Here in the UK, the Bank of England (BofE) also left interest rates unchanged in early November but, similar to our US counterparts, it stressed that they would be staying high for a prolonged period - in an attempt to stop the market from expecting a cut too early. Meanwhile, the UK economy continues to look stagnant, exhibiting no growth at all according to the current estimate (from the ONS (Office for National Statistics)) for GDP (Gross Domestic Product) growth in the third quarter of 2023.
But there are some encouraging signs that could help the UK economy in the months ahead. Inflation has finally started to fall, with UK CPI (Consumer Prices Index) for October coming in lower than expected, at 4.6%. The UK housing market also proved to be resilient in November, with both Nationwide and Halifax data suggesting home values have only fallen 3% over the past year - despite the substantial rise in mortgage rates. Notwithstanding a very tough mortgage market, on the whole, the overall picture is more resilient than had been expected and could help to rebuild fragile consumer confidence, given time.
During the month, we also saw the UK Government announce its Autumn Statement, as Chancellor Jeremy Hunt is seen with the famous red briefcase - the contents of which received a rather muted reaction from UK financial markets. Gilt yields (longer-term government bond borrowing rates) moved fractionally higher on disappointment that government debt issuance would need to remain high. The pound weakened a little (to just above $1.25) whilst the London Stock Market was broadly unmoved by the whole event.
Over in Europe, economic data has been arguably weaker than in both the UK and the US, with GDP slipping 0.1% in Q3 (after growth of 0.2% in Q2) but indicators for October and November suggest some stability may have returned. Impressively, November inflation in Europe has provisionally fallen to just 2.4% - within touching distance of the European Central Bank’s target of 2%.
What this means for our funds and outlook for December
With stock markets and bond markets rising in November, our trading activity has been more focused on selling shares than continuing to buy the government bonds that we have been tucking away in recent months. With share prices now higher, we felt it was again the right time to gently trim some of our longer-held UK shares as we continue to strategically diversify many of our portfolios into more global investments.