After a rough year, November proved a surprisingly positive month for markets. Stocks and bonds rose as inflation expectations eased. Emerging market stocks enjoyed an extra boost from China, as Beijing signalled that it would begin easing its strict zero-Covid policy. The restrictions have hampered domestic demand, hurting businesses both in China and its trading partners. The rules have also squeezed supply chains, helping fuel inflation in Western markets. Any form of easing will be a boost to the struggling world economy.
November saw the chancellor deliver his Autumn Statement, which was fiscal retrenchment of roughly equal parts spending cuts and tax rises. Tighter fiscal policy may sound negative for stocks, but because it reduces inflation expectations it will ease pressure on the Bank of England to hike rates; as such it is positive for stocks. Higher corporation tax will hit UK company profits, but this was already priced into markets. The pledge to increase infrastructure and R&D spending is good news for smaller, high-growth companies, and our Free Spirit fund beat the market to rise 12%.
For investors, the cuts to dividend and capital gains tax allowances make it all the more important to maximise ISA and SIPP contributions. The freezing of the inheritance tax threshold also makes CPN’s AIM IHT portfolio an increasingly useful tool for those pursuing tax efficiency. Our IHT portfolio had a strong month, rising 6%.
The mid-term elections saw the Republicans gain control of Congress. With Democrats holding onto the Senate, it seems the world’s largest economy will now enjoy two years of gridlock in Washington. While this has disadvantages, it does provide regulatory predictability for businesses.
The dollar continued to weaken in November, as investors bet that a peak in inflation would allow the Fed to stop its aggressive hiking cycle. This validated our decision to hedge a large part of our US exposure; our new hedged index beat the unhedged index by 4% over the month.
Eurozone inflation hit 10.6%, a record high since the currency bloc’s formation. However, there were early signs of inflation peaking, with a decline in producer prices in Germany. Mild temperatures and deliberate reductions in demand have kept gas supplies full to the brim, which makes a gas crunch this winter unlikely. Consumer confidence rose, albeit from low levels. Our Lightman fund, which buys undervalued European stocks, returned over 8%.
There were signs that China is loosening its zero-Covid policy after the economic fallout began to outweigh any other benefits. As well as loosening restrictions, there is a drive to jab the elderly, who tend to be anti-vaccine. This was great news for Chinese stocks, which have been hit hard by Beijing’s stern line in the last year. Our T Rowe Price China Evolution fund was the best performer of the month, surging 19%.
At least 22 oil tankers piled up in the Bosphorus after the EU banned insurers from insuring ships moving Russian oil unless the oil is sold below the G7’s price cap. The queue was a visible sign of the disruption in energy markets. Despite this, the mild autumn and ramped-up production in Norway and the US helped keep energy demand satiated, and oil dipped below $80/barrel for the first time since January, which is good news for energy importers. More broadly, emerging markets will benefit from unlocking Chinese demand, and EM stocks delivered a stellar return on hopes of an easing of the zero-Covid policy. Our JPM EMS fund beat the index to rise 12% in the month.
Japan’s GDP unexpectedly contracted by 2.4% in the third quarter, the country’s first negative quarter in a year. The contraction was partly blamed on surging import bills, caused by the weak yen. Economists expect growth to pick up in the final quarter after Tokyo passed a £175 billion stimulus package.
The economic data is bleak this Christmas. Britain is either in a recession or teetering on the edge of one, and the rest of the world is little better. However, investors should remember that the correlation between GDP growth and investment returns is virtually zero. In fact, poor economic times can lead to higher asset prices, because central banks typically cut rates to boost the economy, which raises an asset’s net present value as calculated by discounted future cash flows. We can see this in historical data; real stock market returns were better during the low-growth 2010s than the high-growth 1960s. While the current picture is complicated by supply-side inflation, we believe that investors should not despair, and will be rewarded for taking a long-term view.