Bears retract their claws during October

The MSCI All Country World Index, a broad measure of global equity markets, returned a little over 6.0% during the month of October. The global index is however still down over 20% year-to-date as rising interest rates have acted as magnet to equity prices pulling them back down to earth.

October’s gain in equity prices was largely attributable to expectations that the US Federal Reserve (“Fed”) would slow the pace at which it has been raising interest rates. The US central bank has already raised the Fed-funds rate by 300 basis points this year and as of writing the Fed raised rates by another 75 basis points. Following the announcement of the decision in early November, Fed chairman, Jerome Powell, noted that the Fed would contemplate a smaller hike in December but that it may need to raise rates next year even more than previously projected. The Fed, along with other central banks around the world, has been hiking rates in an attempt to tame roaring levels of inflation. The rate hikes are yet to make a meaningful dent to the level of inflation as the read for September’s CPI came in at 8.2%, only slightly below the 8.3% level seen in August. Making matters slightly worse was that core CPI, which excludes energy and food prices, showed an increase compared to the previous month having risen to 6.6%.

Despite expectations, which for some could also be read as hope, that the Fed could possibly reduce its hawkish intensity, US treasury yields still edged higher during the month as the longer-term 10-year US treasury closed at 4.07% and the shorter-term 2-year ended October at 4.49%, still above its longer-term counterpart. Ordinarily, the longer-term yield is higher than the shorter-term yield but in situations per the above where the opposite applies – what is referred to as an “inverted yield curve” – it often portends to an upcoming recession.  

One might think that a growing possibility of a recession would lead to a selloff in equities, specifically those that are relatively more sensitive to changes in economic growth but the 8.1% gain in the S&P 500 Index during October was largely driven by gains in economically sensitive sectors such as energy, industrials, financials and consumer discretionary (excluding Amazon). Companies within the energy sector were particularly strong, benefitting from higher oil prices during the month. The prices of Brent Crude and WTI rose 8% and 7% respectively, spurred on by news that the Opec cartel, led by Saudi Arabia and Russia, planned to reduce oil production by 2 million barrels a day.

US companies have begun their quarterly earnings season and as per normal, banking companies were first out the gate. In general, their earnings were better than expected which in turn contributed to their double-digit price gains during October. The same could not be said for Big Tech companies. Apart from Apple, quarterly results were mixed to disappointing for the likes of Alphabet (parent company of Google), Amazon, Microsoft and Meta with a strong US dollar and a weaker economic outlook providing challenging headwinds. In addition, the outlook provided by some of the Tech Giant CEOs for the next quarter disappointed as sales were guided to be lower than previously expected. As a result, October’s performance from Big Tech, with the exception of Apple, was below the broader market average and Meta saw its market capitalisation reduce by over 25%. Significant relative underperformance meant that the monthly gain for the Nasdaq Composite Index, which is tech-heavy, was well below the S&P 500, coming it at a little under 4.0%.

In Europe, inflation continues to run rampant. Britain’s inflation for September hit a four decade high of 10.1%, with increases in food prices averaging in the mid-teens. The Bank of England is widely expected to raise its base rate by 75 basis points as it attempts to tame the nation’s inflation conundrum. During September, Liz Truss was announced as the UK’s new Prime Minister which was followed by her introducing a budget that would see taxes for the rich cut and government spending levels increased. Markets were jolted by the “unbalanced” proposal plunging the UK gilts market into turmoil. Unlike her “Iron Lady” counterpart, this lady was for “turning”, towards the exit door that is. The now former Prime Minister was forced to scrap almost every proposal in her budget before resigning from her position which makes her 50-day stint as Prime Minister the shortest tenure in the history of the United Kingdom. In her stead, former Chancellor of the Exchequer, Rishi Sunak, has been appointed as new Prime Minister. The FTSE 100 Index was not left unscathed by the political upheaval but still managed to return 3.0% during the month.

Inflation in the Eurozone continues its upward march as it surged to a record high of 10.7%, beating the previous record of 9.9% reported only one month earlier. The European Central Bank (“ECB”) raised its policy rate by 75 basis points during October brining its deposit rate to 1.5%. The possibility of further rate hikes seems a formality now as ECB president Christine Lagarde stated that the central bank will keep raising rates to fight inflation. Despite the prospect of meaningful future rate hikes the EURO STOXX 50 Index, a broad measure of European equities, returned 9.1% during the month.

Our local equity market ended the month in positive territory as the JSE All Share Index returned close to 5.0% during October. Gains were led by the financial sector as stock prices for banking groups experienced double digits returns. Overall market gains were offset to an extent following sharp declines in Prosus and Naspers which were negatively impacted by the steep fall in Chinese technology giant Tencent whose stock price declined over 20% during the month.

While most equity markets clawed back some lost ground during the October, Chinese equities continued in their downward spiral. China’s equity markets have been plagued by severe lockdowns across various parts of the country which have in turn eroded economic activity. Adding to the negative sentiment in the region is the property sector which accounts for more than 20% of the country’s gross domestic product. Property developers have come under significant strain as homebuyers are refusing to pay mortgages on their unfinished homes. During October, equity prices were hammered down even further following the conclusion of the recent Communist party congress which saw Chinese President, Xi Jinping, secure a third consecutive term as well as consolidate his power as he insured that top leadership positions within the party were filled with loyalists. The shift in power and move from an economic focus to that of security has drawn concern from investors leading to large outflows from Chinese equities resulting in the mainland CSI 300 Index and Hong Kong’s Hang Seng Index falling 7.7% and 14.7% respectively.

The US dollar has outperformed other major currencies year-to-date, as measured by the US Dollar Index, having gained close to 16% on average but during October it did weaken slightly. US Dollar weakness did not however lead to an improvement the price of gold which fell 2% during the month closing at $1,639/ozt. The new age gold alternative, Bitcoin, was surprisingly stable during October and even managed a gain of 5.0%.