Market Views: Multi-Asset
Monthly markets review - November 2019
- Global equity markets were broadly higher in November, with the exception of emerging markets, which struggled with a stronger US dollar. Government bonds yields rose (meaning prices fell).
- US equities rose on hopes of a preliminary US and China trade deal. IT stocks performed well while less economically sensitive sectors – like utilities and real estate – were weaker.
- Eurozone equities also rose, supported by some improving data from the manufacturing sector. Christine Lagarde took over as president of the European Central Bank.
- In the UK, international considerations largely took a back seat over November as domestically-focused areas of the market performed very well and sterling extended its recent recovery.
- Japanese shares ended higher and the yen weakened slightly against major currencies across the month.
- Emerging market equities fell. A number of markets sensitive to US dollar strength lagged, most notably in Latin America.
- Bond markets reflected the better mood as government bond yields rose (i.e. prices fell) and corporate bonds outperformed.
Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
US equities rose in November, amid hopes of a preliminary US-China trade deal. This was despite an indignant Chinese response to President Trump’s support of protests in Hong Kong SAR late in the month. The response served as a reminder to investors that relations remain strained. US economic data was broadly positive and helped support investor sentiment. The US economy expanded by 2.1% (annualised) in Q3; better than expected and stronger than in Q2.
Although the Q3 US earnings season saw companies overwhelmingly beat expectations - over 70% of companies reported better-than-expected results – absolute earnings fell -2.4% year-on-year. Expectations remain weak, given a number of headwinds. The number of companies upgrading their forecasts fell in Q3, with consensus expectations for Q4 earnings to fall.
Even so, it was more cyclical stocks (i.e. those whose businesses do better in times of economic strength) that broadly outperformed. IT stocks were among the strongest over the month given trade optimism. Less economically sensitive sectors – like utilities and real estate – were weaker.
Eurozone equities gained, helped by some improving economic data. The flash composite purchasing managers’ index (PMI) for November dipped to 50.3 (50 is the level that separates expansion from contraction, and the survey is based on responses from companies in the manufacturing and services sectors). However, the manufacturing PMI picked up to 47.1 from 46.6 in October. The German Ifo business climate indicator (based on a survey of firms in Germany) also showed modest improvement, rising to 95.0 in November from 94.7 in October.
Christine Lagarde took over as president of the European Central Bank on 1 November. In her first major speech she urged governments to boost public investment in order to increase domestic demand in Europe’s economy.
The IT, healthcare, materials and industrials sectors led the advance. By contrast, utilities and communication services saw negative returns. Among telecoms stocks, Deutsche Telekom announced it was lowering its dividend to cover the cost of 5G investment. The car industry was in focus as Daimler announced 10,000 job cuts over the next two years. Meanwhile, France’s luxury goods group LVMH bought US jeweller Tiffany & Co for $16.6 billion.
Spain held another inconclusive election; the incumbent Socialists remained the biggest party and agreed a coalition with left-wing Podemos. However, they will likely also need the support of regional nationalist parties. At month-end, Germany’s Social Democrats (SPD) elected new left-wing leaders in a move that could potentially destabilise the grand coalition between the SPD and Angela Merkel’s Christian Democrats.
International considerations largely took a back seat in November as domestically-focused areas of the UK equity market performed very well and sterling extended its recent recovery. This occurred amid a reduction in Brexit and political uncertainty as opinion polls showed the incumbent Conservative Party enjoying a comfortable lead ahead of the general election on 12 December.
If this lead translates into votes, the party is expected to return as the next government with a majority. This will allow the withdrawal agreement to be pushed through parliament, and for the UK to leave the European Union by the end of January, entering a transition period when trade negotiations will begin.
Sentiment towards the domestic areas of the market was also helped by an improving outlook for the UK economy next year due to an expected increase in government spending. Both the Conservatives and Labour have made significant spending pledges as part of their election campaigns and economists say this could translate into a pick-up in UK GDP growth in late 2020/2021.
Latest GDP figures confirmed the UK economy had avoided entering a technical recession in the third quarter after contracting in the previous quarter. Real GDP growth was 0.3% quarter-on-quarter, although this did disappoint consensus expectations of 0.4% growth. Overall, the data suggests that the economy is coping with the uncertainty from Brexit. Households continue to spend, though businesses remain cautious.
After a strong start to the month, the Japanese equity market consolidated to end November 1.9% higher. The yen weakened slightly against major currencies across the month.
Fluctuating sentiment on trade issues was exacerbated by an escalation of unrest in Hong Kong SAR. Moves within the US to express official support for the protesters and minorities in China have added an extra layer of political uncertainty to the trade relationship. As Japan is a major trading partner for both parties in the dispute, the equity market continue to be primarily influenced by short-term reactions to overseas news flow rather than domestic developments.
Economic data released in November tended to be weaker than expectations. Investors are looking closely at the effects of the consumption tax increase, which was implemented on 1 October. The direct inflationary impact certainly seems to be less than anticipated, implying that underlying price pressure is weak. Unfortunately, data on consumption and retail sales is complicated by the effects of the devastating typhoon that struck central Japan in the same month.
The most recent quarterly reporting season for Japanese companies ended in November and was generally in line with expectations. The overall impression from the numbers is that we may be close to the end of the recent cyclical slowdown in earnings.
Asia (ex Japan)
Asia ex Japan equities posted a small gain in November. The US and China remained in dialogue over a phase one trade agreement, although no deal was reached. A stronger US dollar was a headwind for a number of regional markets.
Pakistan rallied sharply and was the best-performing index country, led higher by banking stocks. China recorded a positive return as the authorities provided modest stimulus in response to ongoing soft economic data. Industrial production and retail sales growth slowed more than expected in October. Taiwanese equities also moved higher as aggregate corporate earnings revisions moved higher.
By contrast, the Philippines and Indonesia both finished in negative territory and underperformed. South Korea and India lagged, largely due to currency weakness. Hong Kong SAR also underperformed as ongoing protests continued to weigh on sentiment.
Emerging market equities fell back in November, following strong performance last month. The MSCI Emerging Markets Index decreased in value and underperformed the MSCI World.
A number of markets sensitive to US dollar strength lagged, most notably in Latin America. Chile and Colombia were the weakest index countries, primarily due to currency weakness. Civil unrest persisted in Chile, with anti-government protests emerging in Colombia. Brazil underperformed as a wider-than-expected current account deficit and expectations for further central bank easing weighed on the currency.
Pakistan, where banking stocks led the market higher, and Argentina posted strong gains and were the best-performing index markets. In Argentina, the peso stabilised following the presidential elections in October.
By contrast, Turkey registered a strong return and outperformed. China also recorded a modest gain and finished ahead of the index. Macroeconomic data remained soft but the authorities announced modest fiscal and monetary support measures. Taiwan also posted a positive return as earnings revisions were positive.
Investor sentiment remained positive in November amid hopes of progress towards a deal between the US and China and a moderately better outlook for the economy. Government bond yields rose, while corporate bonds outperformed.
The US 10-year Treasury yield increased nine basis points (bps) to 1.78%. A strong “risk-on” tone early in the month pushed the 10-year yield back toward 2%. Investor optimism was then tempered, however, as President Trump threatened to raise tariffs if no agreement was reached, highlighting the continued difficulty in reaching a deal. US data was broadly positive, with Q3 growth revised up, leading indicators exceeding expectations and signs of a pick-up in housing and construction.
In Europe, German and French 10-year yields each rose five bps, to -0.36% and -0.05% respectively. Italy’s 10-year yield rose 31bps to 1.23%, and Spain’s by 18bps to 0.42%. New European Central Bank President Christine Lagarde called for governments to support their economies. Data showed the eurozone economy should continue to see weak expansion.
The UK 10-year yield increased 7bps to 0.70%. Sterling was over 1% higher against the euro, but unchanged against a broadly stronger US dollar. Sentiment toward the UK is improving on growing expectations of a clear victory for the incumbent Conservative party in the general election.
Corporate bonds outperformed government bonds, with the riskier high yield part of the market performing well, particularly in Europe. Investment grade corporate bond yields rose, but they outperformed due to the returns from income, with the US dollar market producing positive returns in total. Sterling-based corporate bonds benefited from political developments. (Investment grade bonds are the highest quality bonds as determined by a credit ratings agency. High yield bonds are more speculative, with a credit rating below investment grade.)
Emerging market (EM) government bond markets declined over the month with currencies broadly weakening versus the dollar. The performance of individual countries differed significantly. EM corporate bonds saw a positive return led by high yield.
Convertible bonds, as measured by the Thomson Reuters Global Focus index, gained 1.6% in US dollar terms with stock markets moving higher in the month. Valuations moved sideways with European and US convertibles trading slightly above fair value. On the other hand, Asian and to a lesser extent Japanese convertibles remain cheaper.
The S&P GSCI Spot Index recorded a modest gain in November, with soft commodities registering strong returns. Spot palm oil (+16.7%) prices were sharply higher after adverse weather weighed on the supply outlook. The energy component delivered a more modest gain. Brent crude advanced 3% ahead of the December OPEC (Organisation of Petroleum Exporting Countries) meeting while natural gas rallied 17%. Conversely, the combination of a stronger US dollar and uncertainty over a potential US-China phase one trade deal weighed on industrial metals prices. Spot nickel prices fell -18.4% as the world’s largest producer, Indonesia, lifted export restrictions for some companies. Gold and silver fell -3.2% and -6%, respectively.
The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
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