The Month in a Minute
📰 Overall: October proved to be another volatile month, as positive economic data drove higher interest rates and, in turn, falling prices for bonds and shares.
💪 Benchmark Performance: Wealthify October performance was in line with industry benchmarks. Although Ethical Plans underperformed their benchmarks, Original Plans showed mild outperformance, with all Plans still showing healthy outperformance across 2023.
📈 Market Movers: US Shares (-2.20%); UK FTSE 250 (-6.5%).
📋 Plan Summary: Plans with a higher allocation to bonds performed better than those with a higher allocation to shares.
🌍 Original Plans: Shares (-3.20%) and bonds (-0.44%) both delivered negative returns.
🌳 Ethical Plans: Shares (-4.13%) and bonds (-0.23%) both delivered negative returns.
⏲ Going Forward: Despite another tough month for markets, we’re already looking for opportunities that are going to have a positive effect on Plans into 2024, including our US bond allocation.
October saw another month of declining prices for both bonds and shares. Bonds came under pressure, as better-than-expected economic data added to the higher-for-longer interest rate narrative (where investors anticipate central banks maintaining higher interest rates). Higher rate expectations also spilled over into share markets, where sentiment was also hit by geopolitical concerns.
By favouring bonds, our diversified and defensive approach helped protect Plans against the higher price drops of riskier asset classes. And, although Plan performance was affected by the negative impact of rising US bond yields (the return you get on a bond), we remain comfortable with our positioning in this volatile environment.
The higher-for-longer narrative led to rising yields (income returned on investments) and falling prices in bond markets, with US 10-year government bond yields hitting the 5% level for the first time since 2007. The main drivers of this were stronger than expected economic data and continued debt sustainability concerns.
And, as the US government’s borrowing costs have risen rapidly, more debt will have to be issued to fund government spending, which spooked investors.
Taking a closer look at the US, economic data showed more resilience than expected, driven by the booming 4.9% annualised growth figure for the third quarter. Inflation also came in higher than expected, with the number of jobs added nearly double what was estimated.
Looking at the data, the market decided that the Federal Reserve (The Fed) would need to hold interest rates at high levels for longer to combat inflation pressures.
US activity data continued to slow down, which may signal that the economy is beginning to feel the effects of restrictive interest rates.
In Europe, inflation was as expected at 4.3%. Core inflation – which excludes energy and other volatile components – crept lower to 4.5%, in line with market expectations. There is increasing evidence of strain in the European economy, as credit dries up and both sentiment and activity data lower. Closer to home in the UK, there were signs that tight monetary policy was beginning to have the desired effect of cooling the economy.
That said, inflation remained hotter than expected at 6.7%, with the core measure at 6.1%. As has been the case for some time now, prices continue to be driven by a very tight labour market. In terms of activity, the difference between manufacturing and services remained, with the former losing ground and the latter making gains.
While interest rates appear to be in sufficiently restrictive territory to put inflation back on track to 2%, all this points to rates being held higher for longer to achieve this goal.
Most major indices posted negative returns in October, causing global shares to decline by -3.1% and global bonds by -1.2%. As investors took less risk, developed markets fared better than their emerging peers. Being more defensive in nature, US shares delivered a loss of -2.2%. Both European and UK shares (FTSE 100) slumped in October, posting losses of –3.7% and -3.8%, respectively.
Unfortunately, size was a key risk factor, with smaller UK shares (FTSE 250) posting a -6.5% loss in October. Despite further yen weakness, Japanese shares lost steam with a -3.1% loss.
Emerging market shares (-3.9%) delivered slightly more negative returns, led by the performance of Chinese shares. Despite some decent economic data coming out of China, sentiment continues to be weighed down by property market concerns.
It was an interesting month from a currency perspective, given the general depreciation of sterling in September. In October, this continued against the US dollar (-0.38%) and euro (-0.40%), but only mildly. Given the falling investor sentiment, the US dollar appreciated against most currencies, as investors sought comfort in its safety. One thing sterling and dollar had in common was appreciating against the yen, with the pound gaining 1.15% in October.
Investment type performance breakdown
Shares delivered negative returns (-3.20%) for our Original Plans in October, shielded slightly by sterling’s depreciation against major currencies. Our healthy allocation to the US helped stem losses, while UK FTSE 250’s share allocation was a key negative. Our healthy allocation to listed infrastructure also helped protect slightly.
In sterling terms, Bonds outperformed shares with a loss of - 0.44% for the month. Positive returns from our allocation to shorter-dated UK government bonds were only marginally outweighed by losses from our US bond allocation, which we are hoping will add positively to Plans through 2024.
In our Ethical Plans, shares dropped by -4.13%, with growth shares proving more sensitive to rising US bond yields. Bonds posted a modest loss of -0.23%, benefitting from some decent gains in UK short-term bonds.
Money market funds continue to benefit from higher interest rates, providing positive returns for both Ethical and Original Plans.
Summary with Plan details
Due to October’s uncertain market conditions, Plans with a higher allocation to bonds performed better than those with a higher allocation to shares. This market performance justified our cautious and diversified approach, which favours bonds over shares.
Our Investment Team continue to actively monitor the financial markets and their impact on Plans — and are always ready to act in your best interests to events as they unfold. We are constantly evaluating new market information and drivers to try 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.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
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.