November provided a great springboard for the start of the festive season, with markets delivering robust returns (a stark contrast to the general trend of 2022, which has been negative for shares and bonds alike).
This increase in positivity and flow of money into markets has been driven by improvements in both UK and overseas sentiment. There are tentative signs that inflation has reached its peak, as China’s strict Covid restrictions nearing breaking point.
Closer to home, a more sensible budget saw a welcome uplift in UK asset prices and, while we welcomed positive returns in November, we remain cautious on the sustainability of market pricing — especially given the number of material economic and geopolitical headwinds.
Inflation and the expectation of future interest rates in developed markets were again the focus at the beginning of November, with the US Federal Reserve (the Fed) and the Bank of England (BOE) both implementing jumbo hikes of 0.75%. This eased over the month as inflation data in the US hinted at pricing pressures subsiding, which led to higher share and bond prices as the market saw a greater possibility that interest rates are closer to their peak.
Recoiling negativity saw the US dollar move lower against most major currencies, as the market favoured risk assets in November. Inflation continued its downward trend, decreasing from 8.2% to 7.7%, which was lower than the forecasted 7.9%. Despite souring sentiment, the US economy remains in robust health, with household savings and strong employment dominating any recession concerns.
While manufacturing activity has started to soften, the service sector continued to show rapid expansion, boasting another 263,000 jobs in November. The expansion in the service sector continues to drive a large portion of inflation, which means it’s unlikely that we see any near-term changes to the aggressive interest rate hiking from the Fed.
In Europe, the state and outlook of the economy continues to be dominated by the energy crisis. These pressures have eased somewhat, with a mild start to the winter reducing demand and gas storage levels reaching 93% at the end of November. Inflation continued to reach new highs (10.6%) with soaring food and energy prices mostly to blame.
We also saw a greater than expected improvement in sentiment and economic activity, which did little to ease the demand driven components of inflation.
In the UK, data for September (released in October) showed a very slight deterioration in the labour market, with unemployment rising from 3.5% to 3.6%. The services sector remained steady and in line with expectations, while manufacturing sector data surprised ahead of expectations. Inflation continued to rise in the UK from 10.1% to 11.1%.
The good news from this is that inflation has probably peaked with the energy cap now in place. The bad news, however, is that the chance of another 0.75% rate hike has increased.
Share markets posted blistering returns in November, as investors caught wind of the potential for looser financial conditions (decreasing US interest rate expectations) and greater economic activity (relaxing of Covid restrictions in China).
Developed and emerging market shares posted gains of +6.80% and +14.64% in November respectively, as stocks rose across the board.
Within developed markets, UK shares were among the top performers, as sentiment enjoyed an additional boost from a calming of the political chaos we saw in October — as well as a more sustainable financial outlook.
Both the FTSE 100 (+6.74%) and FTSE 250 (+7.12%) benefitted from this in November, whilst European (+6.75%) and US (+5.38%) shares showed similar increases, despite shares in Japan (+2.84%) being less positive.
Emerging markets had a terrific month led by Asia-Pacific (+17.41%) which, in turn, were led by the performance of shares in China. Chinese share prices have been depressed for some time now due to multiple political and economic uncertainties. Indications that the government are likely to relax some of the Covid-related restrictions provided a window to a potentially more robust and stable economic environment, thereby acting as a catalyst for sharp price rises.
After benefitting from the haven trade in October, the dollar retreated against most major currencies in November, as riskier assets were more in vogue. A softening of expectations of US interest rates supported this theme, as the pound (+4.88%), euro (+5.04%) and Japanese yen (+7.15%) strengthened considerably against the US dollar. The pound showed very little movement against the euro but depreciated against a generally stronger yen (-2.45%).
The performance of shares denominated in US dollars was most negatively affected, while the performance of shares denominated in yen was most positively affected. A large part of the US share exposure is hedged back into pounds which benefitted Plans as the pound strengthened.
Investment type performance breakdown
In our Original Plans, shares (+4.99%), infrastructure (+2.06%) and bonds (+1.80%) provided the greatest boost to returns, in what was a bright month against a largely negative 2022. We also saw a similar performance in our Ethical Plans, with shares (+4.18%) and bonds (1.99%) also closing out the month in very healthy territory, as asset prices increased across the board.
Summary with Plan details
Ethical and Original Plans delivered robust positive returns, with all risk levels delivering good results over the month. The relatively stronger rebound seen in share markets, saw plans with a higher allocation of them outperform those with a higher allocation of bonds.
We remain cautious on the strong rebound witnessed in November and have already seen some of these gains returned so far in December. We expect continued volatility as the market reacts and digests the flow of economic data, which itself has a high uncertainty attached to it.
Our Investment Team continues to actively monitor the financial markets and their impact on your Plan — and are always ready to act in your best interests to events as they unfold. We are continually evaluating new market information and key market drivers to help keep your Investment Plan on track.
It’s important to remember that it’s normal for markets to go up and down, with periods of volatility to be expected when you invest. As always, we continue to look for opportunities to position your investments, with the goal of protecting your money and achieving your long-term objectives.
Please remember the value of your investments can go down as well as up, and you could get back less than invested. Past performance is not a reliable indicator of future results.
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