Monthly update: A brighter month for markets

WHAT’S HAPPENING IN FINANCIAL MARKETS?

Stock and bond markets were far more positive in November following a more challenging period over previous months. After many months of uncertainty over rising interest rates, most analysts now believe they have finally peaked.

Central banks the US Federal Reserve and Bank of England left interest rates unchanged at the start of the month. And cooler than expected inflation on both sides of the Atlantic further fuelled optimism that they were done raising them.

At the same time, the all-influential US economy has remained robust, which further buoyed markets. There’s growing optimism about Europe too, where the relatively weak economic outlook makes interest rate cuts more likely, and such cuts could be good for stock markets.

Lilian Chovin, Head of Asset Allocation, Coutts, says: “The data we’ve seen over the last month has cemented the belief that interest rates have peaked, whereas even a month ago there was a chance they could go up again. This greater sense of certainty, along with the ongoing resilience of the US, means the scene is now set for markets to remain relatively positive until the end of the year.

“Risks do remain though, not least high budget deficits and a weakening labour market in many western economies, so we continue to monitor developments closely.”

The value of investments can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs.

WHAT DOES THIS MEAN FOR YOUR INVESTMENTS?

We’d seen signs of an improving backdrop for some time and had already made changes within our client portfolios and funds to reflect that.

Over recent months, we increased our overall investment in global equities, buying stocks through active managers well positioned to pick companies that could navigate the market environment.

We also increased our exposure to global investment grade debt, which can perform well through a resilient economy, and bought a position in long maturity US government bonds. This position increases our sensitivity to changes in US government bond yields, offering potential gains should they fall (and prices rise), which is more likely in an improving economy.

But with ongoing uncertainties in markets, we also bolstered portfolio diversification for our clients by adding gold – an asset that can perform well in a range of economic situations.
 

THIS MONTH’S SPOTLIGHT: HOW IS THE UK ECONOMY PERFORMING AND WHEN WILL INTEREST RATES FALL?

There were few surprises for investors in the UK Chancellor’s Autumn Statement, with markets largely unmoved. But the government’s tax cuts, in the form of National Insurance and business rate reductions, would have been unthinkable earlier in the year due to concerns around inflation. We’re seeing a wider shift towards a world where governments and central banks are becoming more comfortable with the rate at which prices are rising.

The cuts were no doubt made with an election next year in mind as well though, and challenges do remain for the UK economy. UK GDP has been fairly weak for much of the year, and the Office for Budget Responsibility now expects it to grow by just 0.7% in 2024, down from its previous forecast of 1.8%.

Lilian says, “We believe UK inflation should continue to fall this year, offering some respite for investors, but the government’s recent tax cuts may slow its decline, giving the Bank of England another reason to keep interest rates higher for longer. In fact, while an interest rate cut was widely expected in mid-2024, it might not come until late next year.”

At Coutts, we hold fewer UK stocks than our benchmark, and have a slight bias towards quality and mid-cap stocks, which we see as attractive over the longer term as they are good quality companies that represent good value.