October picked up right were September left off as continued uncertainty keeps investors squarely focused on bond yields resulting in more pain for risk assets. It’s worth noting that at one stage during the month, yields on two-year, 10-year, and 30-year US Treasuries were all above five per cent, with the latter hitting 5.15 per cent momentarily, punctuating the prevailing uncertainty.
Unwinding a decade of varying monetary stimuli triggered by the global financial crisis and fueled by COVID as well as the subsequent global aggressive interest rate-hiking cycle aimed to quell the high inflation that inevitably followed will naturally take time and perplex investors along the way. The economic impact is yet unknown, but a recession and a consequent credit crunch seem somewhat inevitable.
Against this backdrop, putting money to work is extremely challenging. A rational and tactful investment approach is required, adopting a balanced and opportunistic allocation strategy grounded in diversification with a focus on cash preservation.
The first half of October was quite positive, thanks to encouraging economic data and a brief dip in bond yields. However, investor sentiment deteriorated in the second half because of a move higher in bond yields and further escalation in geopolitical uncertainty driven by the Middle East conflict.
The sell-off in global equities continued into October with a -2.90 per cent drop. Cyclicals were challenged from the broader risk-off sentiment as disappointing earnings were punished by the market and positive surprises experiencing minimal uplift. Utilities stood resilient due to its defensive characteristics (+0.55 per cent) while all other sectors were in negative territory. The worst performers were the Consumer Discretionary (-4.79 per cent), Industrials (-4.18 per cent) and Health Care (-4.17 per cent), driven by profit warnings and weaker results. At a regional level, the US markets outperformed relative to the European markets (-2.20 per cent vs -3.68 per cent).
Gold emerged as a robust performer compared to traditional safe-haven assets such as the US dollar and government bonds. Bitcoin, also referred to as digital gold notably surged from $27,000 to roughly $35,000, stimulated by expectations surrounding an imminent spot Bitcoin exchange traded fund.
The onset of November offered some much welcome respite. Equities recovered, mainly due to a moderation in upward pressure on interest rates. Despite the robust economic activity and labour market data, the US Federal Reserved (‘FED’) maintained a steady policy rate and the S&P500 rallied sharply by 5.88 per cent as a result. A 3.44 per cent gain in the EUROSTOXX 600 followed, attributed to easing European inflation. A more sustained rally, however, is likely to require further support from investment inflows and sentiment tailwinds, given the ongoing valuation and macro concerns.
The hard/soft landing debate rages on as expansionary fiscal policies meet credit tightening. With US growth peaking, Europe in stagnation and China on a structural downtrend, sub-trend global growth in 2024 is to be expected.
The resilience of the private sector coupled with large fiscal deficits should prevent a deep recession while potential stabilisation in China may also help. Looming concerns over the fiscal trajectory in developed market economies have made a commitment to fiscal discipline becoming increasingly urgent.
No easy options
In this current market, it remains challenging to find attractive opportunities to deploy cash. Earlier this year, short-duration Treasury yields of more than five per cent in the US and three per cent in the EU made “T-Bill and Chill” a popular motto for investors. As peaking rates have set in, investors have now crowded into the relative tranquility offered by two-year sovereigns, reducing reinvestment risk by extending duration thereby securing yields of around 5 per cent in the US and three per cent in the EU.
The market sentiment shift toward risk-off is influenced by surging real rates, mixed earnings, geopolitical intricacies, and a general market sell-off. The prevailing scenario fuels the argument favoring bonds over stocks. Bonds displaying more signs of capitulation coupled with an elevated yield gap indicate that the risk-reward for bonds seems increasingly promising compared to equities. However, there’s potential for a year-end rally for equities to materialize as seasonal positivity is supported by a bounce back on relief from peak duration pain and continued signs of disinflation.
As companies publish their results for the third quarter, earnings per share have slightly exceeded estimates, although the overall results and share price reaction have been soft. Consensus estimates of a pick-up in earnings in 2024 look unrealistic given expectations of slowing nominal growth. The challenges continue, with expectations of high rates plateauing and staying there for longer than expected diminishing chances of any material valuation expansion.
In an uncertain investment landscape, prudence is key. As investors brace for a slowing economy there are alternatives to equities. Bonds offer a high-income proposition at an attractive price risk-reward distribution. Investors may also consider adding alternatives that can provide additional diversification, durable streams of income, and more robust rates of return.
Maintaining well-balanced portfolios focused on preserving cash and utilizing drawdowns as opportunities to buy shares in select quality companies may be opportune investment strategies as we close off the year. Obtaining equity exposure from the more diversified EU stock market may also provide downside protection given extreme valuation and positioning gaps relative to the US.
The forum was chaired by Chief Officer of Financial Stability and Statistics Alan Cassar
While the local bond market has registered strong growth since 2019, there is a clear opportunity to accelerate this growth
The Energy Efficiency and Renewable Energy Malta Fund, used by banks to offer 0% green loans, has been fully utilised