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On the face of it, this was a period of relative calm when compared to the previous reporting period but the positive returns from most indices masked a no less volatile period.   Following continued weakness, equity markets rallied strongly into the end of the period, recovering from their October lows.  The FTSE All Share gained +5.1% with the more domestic FTSE 250 gaining +2.5%, behind the FTSE 100 return of +5.7%.  Elsewhere, in sterling terms, the FTSE World ex-UK returned +4.1%, the FTSE Eurofirst 300 +8.6%, the MSCI Asia Pacific ex-Japan -0.4%, the MSCI Emerging Markets -1.8% and the Japan Nikkei 225 +3.9%.  The NASDAQ fell -3.8% despite the strong US economic backdrop, while the S&P 500 gained +3.3%.

The return profile was similar across credit markets with volatility remaining a prevailing theme.  Bond markets continued to trend lower as interest rates rose globally and they were further tested in September post the disastrous mini-budget.  Whilst the bond market registered a strong rally late in the period, it was unable to claw back the full drawdown and remained in negative territory for the reporting period.  The FTSE UK Gilt All Stocks Index lost -11.4%, the iBoxx Sterling Corporates Index -5.1% and the FTSE UK Gilts Index Linked All Stocks -14.8% as tighter monetary policy continued to curb long term inflation expectations.  The shorter end of the curve outperformed the longer end, highlighting the continued uncertainty surrounding the outlook.

Ongoing concerns about inflation and further central bank tightening remained at the forefront of investors’ minds.  Central banks did deliver another round of steep policy rate hikes in December with the Federal Reserve (FED) and the Bank of England (BoE) raising policy rates to 4.5% and 3.5% respectively.  However, despite headwinds from tighter monetary policy, investor sentiment improved significantly over the period after the release of the latest US inflation number, which continues to fall from a peak of +9.1% in June as well as the recent US non-farm payroll numbers, which indicated slowing wage increases.  The idea that the end of the rate hiking cycle is not far off, gave both stocks and bonds a boost. 

In China, policy makers introduced an easing of some control measures and increased their drive to vaccinate more of the elderly which reignited hopes that the country is moving incrementally towards the end of its zero Covid policy.  This prompted a turnaround in performance of Asian and Emerging Market equities late on in the period.  A strong recovery in Chinese demand would be beneficial not only for China but also for all major trading partners in the region.

In the US, macro data continues to point to a resilient US economy.  There remains a wide gap between very negative consumer sentiment and actual consumer behaviour as excess savings in a resilient labour market, currently appears to be prevailing over growing concerns about a loss of consumer purchasing power.  The unemployment rate rose slightly but the slump in housing activity remains the largest concern.  The sharp increase in the 30 year fixed mortgage rate is depressing housing affordability to levels last seen in 2006.  US inflation, as mentioned previously, cooled slightly during the period and we expect inflation to continue to ease as the global backdrop is weakening.

In Europe, the inflation number continued to climb with food prices and energy costs the main drivers.  Europe also faced the risk of running out of gas this winter although this has reduced in recent weeks, thanks to relatively mild temperatures and reduced demand.  At the end of November, storage was at 93% of capacity.  On a more positive note, indicators of economic activity in the Eurozone surprised at the upside.  This helped fuel the late rally in both European equities and Government bonds.

In the UK, the inflation story was similar to Europe with headline inflation starting to fall but remaining high at +9.3% YoY in November, again driven by rising food prices and utility bills.  Retail sales grew in October whilst consumer confidence also improved slightly although both remain below pre-Covid levels.  Nevertheless, consumer spending is likely to remain under pressure going forwards, given the squeeze on incomes. 

As we move into 2023, it is pleasing that bond and equity markets have recently been able to recover some of the steep losses that occurred in the first nine months of the year, however, uncertainty does remain.