Investment Outlook November 2024
On the last trading day of October, stocks erased all gains made during the month, mainly due to a sell-off in major tech stocks – particularly Meta and Microsoft, which saw declines after posting disappointing earnings. While there were widespread concerns that October could bring high volatility ahead of the U.S. election, equity markets mostly advanced in a steady manner until the final day, when volatility remained largely limited to interest rates and currencies.
The highlight of the month was the significant rise in U.S. Treasury yields, with the 10-year yield increasing to 4.30% from 3.76%, a sharp jump considering the context and timeline, despite the Federal Reserve beginning rate cuts last month. However, this swift rise in yields has had limited impact on equities thus far. The Treasury market’s weakness this month was partly attributed to factors like rising odds of a Trumps presidential win, given potential effects on deficits and tariffs. Yet, much of the volatility could also be explained by unexpectedly strong economic data, particularly September’s strong non-farm payrolls report.
We’re maintaining cautious outlook for now. Although a soft landing appears possible, much of this optimism is already reflected in equity prices. While there’s still a risk that yields continue to rise in the short term, government bonds stay appealing for long-term investors.
BENDURA Investment Policy
| very unattractive | unattractive | neutral | attractive | very attractive | |
|---|---|---|---|---|---|
| g | g | g | g | g | g |
| Liquidity | b | ||||
| g | g | g | g | g | g |
| Fixed Income | b | ||||
| Government | b | ||||
| Corporate | b | ||||
| High Yield | b | ||||
| Emerging Markets | b | ||||
| Duration | b | ||||
| g | g | g | g | g | g |
| Equities | d | ||||
| United States | d | ||||
| Eurozone | d | ||||
| United Kingdom* | d | ||||
| Switzerland* | d | ||||
| Japan | d | ||||
| Emerging Markets | d | ||||
| g | g | g | g | g | g |
| Foreign Exchange Rates | |||||
| USD | r | ||||
| EUR | r | ||||
| CHF | r | ||||
| EM Currencies | r |
The terms attractive / unattractive describe the return potential of the various asset classes. An asset class is considered attractive if its expected return is above the local cash rate. It is considered unattractive if the expected return is negative. Very attractive / very unattractive denote the highest conviction views of the BENDURA Investment Committee. The time horizon for these views is 3-6 months.
Global Economy
September’s inflation report in USA brought mixed signals. Headline inflation dropped slightly to 2.4% from 2.5% in August, a positive sign. However, core CPI, excluding food and energy, rose to 3.3%, up from August, driven mainly by housing costs. As the economy cools and the Federal Reserve eases policy, minor inflationary surprises may arise. A few more months of similar core CPI readings could heighten concern, especially given continued above-trend growth and wage increases at 4%. Strong labor data also emerged, with September payrolls jumping to 254 thousand, above the 150 thousand consensus, along with an upward revision of the prior two months by 72K. A resilient growth environment has prompted markets to reduce expectations for a Fed rate cut; the odds of a 50-bp cut in November dropped from ~35% to 0%, and the year-end fed funds rate median rose from ~4.15% to ~4.40%.
The ECB cut its key rates by 25 basis points, marking its first back-to-back cut in 13 years and taking the deposit rate to 3.25%, as it moves further into its easing cycle. Policymakers, concerned about September’s inflation undershoot and weaker PMIs, acted quickly, although inflation rebounded in October. Elsewhere in Europe, data was mixed. PMI data showed a slowdown, with the Eurozone composite PMI remaining in contractionary territory, notably in services, while Germany’s confidence data remained weak despite hints of stability. However, Eurozone Q3 GDP surprised positively with a 0.4% expansion, with strong contributions from Germany, France, and Spain. Eurozone inflation in October ticked up to 2% from 1.7%, with core inflation steady at 2.7%. In the UK, budget concerns impacted private sector activity, with the flash PMI at an 11-month low of 51.7.
Growth in the Chinese economy accelerated in the third quarter, meaning that the economic trough has been passed for the time being. However, growth was well below potential and reflects the ongoing problems on the real estate market, the weak propensity to consume and invest and the low level of stimulus to date. Since the end of September, monetary policy has been significantly loosened by Chinese standards. However, the problem is still not the supply of credit, but demand. In order to avoid the liquidity trap, fiscal measures were therefore announced in mid-October, although their scope is unclear. Nevertheless, thanks to this diligent fiscal spending, growth should continue to gradually accelerate at least until the end of the year.
Equities
Stocks gave back all of their October gains on the last trading day of the month after tech heavyweights, particularly Meta and Microsoft, fell following disappointing results. Despite widespread fears that October could be volatile in the run-up to the US elections, equities continued to rise in a fairly orderly fashion until the last trading day of the month – the flare-up of volatility was limited to interest rates and currencies. The markets are eagerly awaiting Nvidia’s figures, which could bring some movement to the market on November 20.
In the US, shares held up well until the last day of trading, when disappointing quarterly results from major technology companies pushed share indices down and caused the S&P 500 to record its first monthly loss since April. The index ended the month down 1%, but remains solidly in the green, up 20% for the year. The Nasdaq ended the month down 0.52%, although it had its worst day in almost two months on the last trading day, falling 2.8%.
In Europe, indices struggled to find their direction and most markets were down. The Eurostoxx 600 ended the month down 3.35% as a handful of large European companies (ASML, LVMH, VW) reported negative results that dragged the major indices lower. In Asia, equities fell in October, ending a four-month winning streak, as markets in Greater China reversed some of September’s gains due to doubts over the extent of fiscal stimulus and the region suffered significant headwinds from the currency market.
Fixed Income
Treasury yields rose sharply across the board, with the 2-year yield climbing over 50 basis points to surpass 2.15%, and the 10-year yield rising nearly 50 basis points to approach 4.30%. Notably, the 10-year U.S. Treasury yield has closely mirrored prediction market trends showing increased odds of Donald Trump returning to the presidency. The spread between corporate bond yields and US Treasury yields has fallen to its lowest level in almost 20 years as investors bet on a soft landing for the world’s largest economy. The premium (or incremental cost of borrowing) paid by investment-grade companies over the yield on US government bonds fell to 0.83 percentage points, the lowest level since March 2005. According to ICE BofA, the premium paid by borrowers in the high-yield or “junk” bond market is now just 2.89 percentage points, the lowest level since mid-2007. Falling spreads – an indicator of default risk – reflect investor confidence that the US Federal Reserve will succeed in curbing inflation without triggering a recession in which some companies would struggle to repay their debts. However, some fund managers fear that the 11 trillion dollars in debt will not be used to pay off debt. The $11 trillion US corporate bond market is too complacent about the ongoing economic risks or the potential turmoil after the November presidential election.
In Europe, yields have similarly spiked despite ongoing rate cuts and dovish signals from major central banks. As long as growth momentum remains subdued and inflation remains close to the central bank target, there is further scope for interest rate cuts by the European Central Bank (ECB) and the Bank of England (BoE). For the latter in particular, we expect a lower level at the end of the rate cut cycle than the market is anticipating. This continues to suggest a yield divergence with the markets on the other side of the Atlantic, with greater opportunities for price gains in Europe. We see comparatively less earnings potential in Switzerland, as yields have already fallen sharply this year and are at a low level. The UK stands out with a 45-basis-point increase in yields, fueled by fiscal concerns.
Commodities and Currencies
Gold has seen a significant rally this year, hitting its 40th record high as of October. Demand has been strong, and it’s projected that total gold purchases might surpass $100 billion in the third quarter, a landmark driven primarily by investment purchases. According to the World Gold Council, inflows into gold-backed ETFs reached 94 tones, reversing a trend of nine consecutive quarters of outflows. This surge in demand has been influenced by family offices and wealthy individuals, who are increasingly purchasing gold due to concerns about high government debt, especially in the United States.
Gold reached a record price of around $2,790 per ounce recently and has posted monthly gains consistently this year, apart from a minor drop in January and a flat performance in June. With central banks moving into a rate-cutting phase, analysts expect continued strong allocation to gold. The uncertainty surrounding the upcoming U.S. presidential election is also adding to the appeal of gold as a safe haven asset. While gold has recently diverged from its traditional correlations with a strong U.S. dollar or rising yields, expected declines in real yields may further support rising gold prices. The dollar has also benefited recently from better US economic data which has dampened Fed rate cut expectations in the futures market and boosted US government bond yields, with particularly strong effects on interest rate-sensitive currencies such as the Japanese yen. At the same time, inflation risks outside the US continued to decline. For central bankers in the euro area, this has led to a shift in focus towards economic risks. We assume that after the US elections, fundamental changes in the currency market will again become central, making the issue of interest rate convergence even more important.
