Investment Update – October 2023

Global equities had a poor month, registering a fall of 4%. Weakness was broad based with energy the only sector that saw positive returns. The UK and Japan outperformed US equities, with the Eurozone the worst performing region. For UK investors, losses were partially offset by sterling weakness.

September was another month of upheaval in bond markets, with US government bond yields hitting a 16-year high, despite a continued decline in US inflation. There are concerns that the Fed may implement another rate hike in November in response to resilient economic activity, as well as keeping rates higher for longer. Efforts to bring inflation down have also been undermined by the recent surge in oil prices, as they close in on $100 per barrel.

The Bank of England turned down the opportunity to raise rates again in September, with the Monetary Policy Committee voting by a narrow majority to maintain interest rates at 5.25%. This followed a downside inflation surprise in August, tentative signs that the labour market is cooling, and weaker levels of economic activity. The Federal Reserve also left borrowing costs unchanged in September, but the European Central Bank pushed ahead with what is likely to be the last rate rise of this cycle.

The major central banks have now paused their rate hiking cycles and despite their hawkish rhetoric, it’s unlikely they’ll resume. The impact of previous monetary tightening is still working its way through the global economy, inflation continues to decline, Chinese and European economic activity is weak and labour markets are beginning to cool. Investors are anticipating rate cuts as early as spring next year.

UK headline inflation is on track to fall below 5% before the end of the year, and employment markets continue to normalise, suggesting wage inflation will progressively slow as we enter 2024. The recent fall in bond yields is feeding into fixed-rate mortgages, which in time should bring some stability to the housing market. UK consumer confidence should also receive a further boost as real wage growth turns increasingly positive.

Written by:
Charlie Lloyd
Head of Investment, Skerritts

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