monthly update: Why conditions could improve between now and year end

WHAT’S HAPPENING IN FINANCIAL MARKETS?

It’s been another tough month for markets as the prospect of US interest rates staying higher for longer made investors nervous. But barring any unexpected shocks, Coutts expect things to improve by the end of the year.

There was a sharp sell-off in the bond market in October, with long-term US government bond yields hitting highs not seen for 15 years. This was driven by uncertainty around interest rates, driven by a stronger-than-expected US economy.

Alongside this, there is  usually some seasonal volatility in September and October as fund managers and stock pickers clear their portfolios of underperformers. But stocks typically recover in the last two months of the year.

Monique Wong, Head of Multi Asset Portfolio Management at Coutts, says: “While investors were feeling positive over the summer, surveys suggest nervousness is now growing. But that could be a good thing. From a contrarian perspective, it could mean investment opportunities lie ahead – the chance to buy assets at a good price – and we believe we could see a trading rebound between now and the end of the year.”

Meanwhile, as the terrible events in the Middle East unfold, we continue to uphold our fiduciary duty to clients to monitor the impact on markets. So far, we see limited movement within stock and bond markets as a direct result of the conflict.

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

WHAT DOES THIS MEAN FOR INVESTMENTS?

Inflation is slowing, global economic growth is picking up and central banks are nearing the end of their interest rate hiking cycles. With this in mind, Coutts have made some changes to their  portfolios.

Increased investment in global equities – US economic growth remains robust, with falling inflation, a resilient jobs market and strong consumer spending all playing their part. Because of the global influence of the US, Coutts have increased their  exposure to global equities slightly, favouring active managers well positioned to pick companies that can navigate the current environment.

Bought gold – with risks remaining in markets, including record fiscal deficits in western economies, Coutts added greater diversification to our portfolios and funds by buying gold. This so-called ‘safe-haven asset’ could perform well in a range of different economic situations.

Adjusted government bond investments – Coutts recently bought long-dated US government bonds. They  believe the run of interest rate rises is coming to an end, which could mean a more positive outlook for bonds. 

THIS MONTH’S SPOTLIGHT: Earnings season kicks off

US earnings season began in mid-October. Much of the news so far has been positive, but due to perhaps excessively high expectations, market reaction has been muted.

For example, after an impressive first half of the year, some of the leading US technology firms – the so-called ‘Magnificent Seven’ of Apple, Microsoft, Nvidia, Meta, Amazon, Alphabet and Tesla – have felt increasing pressure from investors to deliver strong earnings. Last month saw big falls in Tesla and Alphabet following results which disappointed investors.

Howard Sparks, US Equity Research Analyst at Coutts, explains: “We’ve seen negative market reaction to generally positive news on company earnings. Expectations were high going into earnings season, which meant any signs of weakness were severely punished.

“Additionally, the continued resilience of the US economy means there’s uncertainty around when we’ll see peak rates and for how long they’ll need to remain high. And this has impacted investor appetite for equities.”

This reaction reemphasises the nervousness from investors and how sensitive markets can be during these times. But it’s worth highlighting that this negative reaction and related weak market performance isn’t uncommon and we see current levels as potentially being attractive given the  expectation for things to improve for the rest of the year. 

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