Investment Commentary – November 2023

2 minute read

Equity markets saw continued weakness in October, particularly during the second half of the month. Once again, rising bond yields rattled investors as economic growth proved to be more resilient than expected. Equity selling was concentrated in some of the largest capitalisation technology stocks that had outperformed much of the market over the year to date. Furthermore, generally resilient earnings, many of which outstripped expectations, were not sufficient to overcome selling pressure.


The bond market continues to confound investors. Although interest rates and shorter-dated bond yields have held steady, longer-dated bonds have seen another rise in yields. This has had the impact of flattening the yield curve. The reasons for this are unclear, however, recent economic resilience, combined with heavy new issuance are likely to be partially responsible. With little change in expected inflation, longer-dated bonds now trade with an attractive real yield. Without an increase in inflation or economic growth, yields are likely now overstretched. However, anticipating any change in direction is very challenging.


A flurry of quarterly results were released in the month. Notable beats were seen from Microsoft and Amazon, posting higher revenue and earnings than analysts forecasted. Conversely, disappointments were seen from Alphabet (Google) and Tesla. A focus of company earnings calls was the generally weakening economic outlook. Of particular note was Tesla, which was guiding that their selling prices may need to fall further to compensate for higher financing costs for customers. Tighter margins and potentially lower volumes are now on the table. Since mid-September, shares have fallen 28 percent.


In the UK, inflation data held steady during September, at 6.7%, in line with August. The headline figure was helped by easing food prices as well as household energy bills. However, the rising oil price and corresponding increases in petrol and diesel prices offset these gains. Looking forwards, there is reason for optimism. Firstly, regulation of the energy price cap means that there will continue to be a tailwind from household energy costs for several quarters. Furthermore, gas and electricity prices appear to have stabilised. Secondly, with food prices now falling, a further 1.5% could be knocked off the headline figure through direct and indirect effects. In anticipating inflation it is important to consider the interconnection of sectors. For example, food input costs are a key factor in hospitality services, which have also been impacted by energy and labour costs. Therefore, in the same way that rising prices had multiple knock on effects, falling prices in key areas may lead to broader falls.


Finally, the heating up of conflict in the Middle Eastern does have the potential to impact markets. The risk of a wider regional war in such a heavily oil exporting region means that another energy price shock should not be discounted. The mechanism for this to occur could come from sanctions (from buyers or sellers), production cuts or direct damage to infrastructure. Oil producing countries in the Middle East and Gulf states account for almost 40% of global oil exports and can therefore collectively exercise significant influence on prices. Furthermore, if political or emotive decision making takes precedence over the traditional economic thinking of OPEC, policy and prices will be very difficult to anticipate.