I’m Neil Birrell, Premier Miton’s Chief Investment Officer. Thanks for reading ‘Market Watch’, our monthly summary of the key events in financial markets.
For information purposes only. Any views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
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November – in brief
• The major central banks left interest rates unchanged at their latest meetings.
• The economic data is encouraging; inflation is slowing, but so are economies.
• What went down, is going back up, quickly.
Sometimes it’s really hard not to focus on the short term
We are always told to invest for the long term as the short term can be unpredictable and we don’t want to have to sell investments at low points. Therefore, we should not look at short term moves in financial markets. However, it is hard not to sometimes, particularly in the modern world of instant communications and news when everything happens so fast.
The October edition of Market Watch was all about what happened in the first few days of November and in this edition, for November, I will refer to the follow through, because it is worth reviewing.
If you remember, a month ago all the chat was about the central banks of the US, UK and EU all keeping interest rates on hold and a growing view that we may have hit the peak in interest rates. Well, that view grew and grew, to such an extent that expectations are now that there is a strong likelihood of interest rates actually being cut in the first half of 2024.
Really? That could happen?
Clearly that is dependent on public enemy No. 1 (inflation) behaving itself and the signs are that is happening.
In the UK, the year-on-year increase in the Consumer Price Index (CPI) fell to 4.6% in October, down from 6.7% in September, although that did include a big energy price spike falling out of the calculations. We are also seeing the UK jobs market slow somewhat, which should be associated with slowing wage growth, both of which help ease inflationary pressures.
In the EU, inflation is tracking back towards the European Central Bank’s target of 2.0%. In November the year-on-year increase was 2.4%, down from 2.9% in October and lower than expected.
It is a similar story in the US; even though the economy there remains relatively robust, the CPI fell to 3.2% in October, down from 3.7% in September. We await with interest the November data, which is due to be released on 12 December.
All in all, the outlook for inflation and interest rates has improved markedly in a short space of time.
What did that mean for my investments?
At the risk of being somewhat flippant, those investments that have done less well as interest rates have risen should do better when they are expected to start falling, and that has largely happened. Bonds, as measured by conventional gilts issued by the UK government, were strong, as were medium and small sized companies listed on the UK stock market, which, as a group have been struggling.
Shares in property companies also did well and showing just how sensitive asset prices can be, house prices in the UK rose for the third month in a row in November according to the Nationwide Building Society.
Financial markets moved in a similar fashion in other regions as well.
That’s it then, it’s all OK now
Well, if only it were that easy.
There are still significant risks to the outlook, led by inflation going back up, or not falling further. That would reduce the chances of interest rates coming down, which would increase the risk of economies slowing more than expected and recession, possibly a bad one, ensuing. Furthermore, it might be that the interest rate increases we have had already will bite harder than expected and recession is unavoidable anyway.
However, the economic and financial market outlook has improved and in my view the reaction of financial markets to expect the return on cash deposits to fall and the return on riskier investments such as bonds and company shares to rise is the correct one.
The short term remains the focus
As much as I would like to think about the long term, I will still be poring over the economic data releases through the month and listening closely to what the US Federal Reserve Bank, Bank of England and European Central Bank have to say when they next announce their interest rate policy on the 13th and 14th of December.
It is probably safe to say there will be no change to their interest rates, but there will be a lot of interest in what that have to say about the outlook for their policy in 2024.