Investment Commentary – November 2021

2 minute read

Following a short period of weakness in September, equity markets rebounded sharply in October. In the US, the S&P 500 reached a new all-time high, recouping a 5.2% drawdown. The buoyancy in the equity market corresponded to a period of consolidation within fixed income, where government bonds which had been selling off in tandem with equities, slowed their decline.


The pathway of monetary policy continues to drive much of the market direction. There is now a fine balance and fierce debate over the timing and magnitude of any interest rate rises as well as quantitative tightening, and the order of implementation. Over the month, market participants have continued to price in earlier and faster interest rate rises, following the guidance of central banks. However, while short-dated bonds have reflected this change, longer dated issues have been less quick to react. Concerns remain that heavy handed monetary tightening now may choke off a recovery and damage long term growth potential, leading to lower rates and inflation over the longer term. Nevertheless, the current guidance set out for initial interest rate increases followed by monetary tightening should mean that longer dated bonds will see their yields driven higher, although at this point in time, there is naturally greater uncertainty that this will come to pass.


Events in China turned positive as Evergrande, the indebted property company, managed to pay overdue interest on an international bond before the end of the 30-day grace period. While this led to a short-term rally in their shares, there appears little prospect of them repaying or refinancing all of their $300bn outstanding debts without a restructure. This is likely to be an ongoing focus of markets over the coming months.


In the UK, the budget and spending review was on Wednesday 27th October. The event illustrated the strength of the economic recovery seen over the year. Since the last Office for Budget Responsibility forecasts in March growth has been revised higher by 2.5%, bringing down forecast borrowing in the tax year 2021/2022 by £51bn, as well as in future years. While some of this windfall has been used to boost government spending the chancellor was keen to begin the repair of the country’s finances. Looking forward, it was stressed that the focus will be on reducing taxes, in a change of direction from the recent policy changes.