Market Review and Outlook
Review of November 2017
Despite a sharp fall in the value of global equities and high yield bonds mid-month, the MSCI World index of developed stock markets rose 2.2% in November in US dollars, and 2.6% in local currency terms. The iBoxx Global High Yield Index ended 0.2% up over the month.
The mid-month tremor was led by the high yield market, which saw a bout of profit taking triggered by a handful of negative, though relatively unremarkable, U.S corporate stories. However, with spreads in U.S credit very slim some investors did not want to continue to hold an asset class that appears to many to be overvalued.
Other risk asset classes, notably equities, fell in sympathy.
Uncertainty over President Trump’s ability to push tax reform through Congress, a flattening Treasury yield curve (indicating perhaps recessionary conditions ahead), and weaker industrial metals futures prices in China were also offered by market commentators as explanations for the sudden weakness in investor sentiment.
However, it didn’t take long before a recovery in stock markets kicked in, which was also seen in some credit markets.
The recovery was supported by the announcement of a fresh Rmb310 bn ($47bn) liquidity injection by the Bank of China into the country’s financial system. Investors took heart from the release of Fed minutes which appeared to suggest that the central bank was taking a more dovish approach to monetary policy.
A rally in tech and energy stocks allowed the NASDAQ and S&P500 to record yet more record highs once market sentiment recovered. European stocks, though, struggled to rebound due to country-specific themes and strong currency movements against the U.S dollar.
In Germany, the Xetra Dax index reached new highs early in November on strong domestic and euro zone economic data, but the collapse of coalition talks between Angela Merkle’s CDU and other political parties cast a cloud over investor sentiment, while a stronger euro negatively affected export-led sectors.
The FTSE 100 was negatively affected by weakness in commodity stocks, and the strengthening pound after Prime Minister Theresa May made concessions in Brexit negotiations which were seen as helping to improve the chances of a negotiated settlement.
Of note was the Hong Kong stock market, with the MSCI Hong Kong index up 3.5% making it easily the best performing developed stock market. The stock market is up 32% since January, benefitting in part from mainland Chinese investors who see investment in HK$ denominated assets as a hedge against a possible future devaluation of the renminbi.
The MSCI Emerging Markets index rose 0.2% in dollars, and fell 0.4% in local currency terms. Middle Eastern markets were particularly affected by fears that Lebanon may become a new battlefield in the proxy war being held by Iran and Saudi Arabia.
Nationwide reported U.K house price inflation in the year to November at 2.5%, unchanged from September. Most housing experts suspect that central prime London will continue to be the most vulnerable part of the market. The Chancellor’s Autumn Budget in November lifted stamp duty on properties below a certain value for first time buyers, so supporting demand at the lower end of the market. He also announced a raft of measures intended to boost the supply of new houses.
The swift recovery in many stock credit markets after the mid-November fall illustrates what we have been saying, for most of this year, about risk assets in general.
So long as central banks keep interest rates remain low, and strong global growth feeds through into corporate earnings growth, there is little risk of a sustained bear market developing in the near term.
But such scenarios to not persist indefinitely. What might eventually cause a sustained bear market? There are two schools of thought.
The primary risk is a self-inflicted recession in the U.S. This, the idea goes, comes from the U.S Fed raising interest rates too high, too fast, and so shutting down growth. This risk is arguably reflected in the market by the flatter U.S Treasury yield curve, which has been much written about in recent weeks.
Another scenario -effectively the opposite to the above- is that inflation accelerates, and central banks react too slow to address the problem, perhaps deliberately in order to alleviate the weight of debt on governments’ balance sheets. This would lead to a jump in bond yields, and as risk free rates increase investors will jump from risk assets such as equities. This fear is perhaps reflected in the tight pricing of index inked government bonds.
The content of this publication is for information purposes and should not be treated as a forecast, research or advice to buy or sell any particular investment or to adopt any investment strategy. It does not provide personal advice based on an assessment of your own circumstances. Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness. Any expressions of opinion are subject to change without notice.