Market Summary | November 2022

MARKET OVERVIEW

Global equity markets continued their ascent, rising 6.8 per cent in USD terms in November, following the 7.2 per cent jump in October. Despite another round of rate hikes by the US Fed (75 basis points to 4 per cent), the Bank of England (75 basis points to 3 per cent) and several other central banks in response to high inflation, markets instead focussed on the prospect of a de-escalation in the magnitude and pace of central bank policy tightening. While the Fed had been hinting at a possible “step down” in the pace of tightening given the cumulative moves to date and the lagged impact on the economy, better than expected US inflation data for October was the catalyst for a 5.5 per cent lift in the S&P500 on November 10.

Over the month, markets unwound some of projected tightening and bond yields rallied while risk assets benefited from a perceived lower risk of a “hard landing” and lower discount rates.

UNITED STATES & DEVELOPED MARKETS

The recovery in equity markets was most noticeable in markets that have been hit the hardest in 2022, with Europe ex-UK up 11.5 per cent, well above the 5.4 per cent gain in the US. The UK market was 10.8 per cent higher while Germany rose 14 per cent. Hong Kong surged 24.5 per cent as China seemed to relent on its zero-Covid policy. Japan rose 9.7 per cent while the Netherlands was a standout with a 17.3 per cent gain. For the year-to-date Europe ex-UK is down 18.1 per cent, Japan 16.9 per cent, the US 14.8 per cent while the UK is down just 4.5 per cent. USD-based investors in Australia are down just 3.3 per cent in 2022.

As noted above, the key development was the October CPI data showing a decline in inflation to 7.7 per cent from 8.3 per cent. Core inflation rose only 0.3 per cent in the month, well below expectations and recent 0.5-0.6 per cent readings. The economic data for the US remains mixed. Housing indicators are all weaker, not surprising given their sensitivity to higher interest rates. Housing starts are down more than 20 per cent since April, existing home sales are off 32 per cent in 2022, new home sales are down 30 per cent from recent peaks, builder sentiment has crumbled while house prices have fallen more than 3 per cent in the past three months. The US manufacturing ISM index dropped below the important 50 level for the first time since 2020. However, payrolls expanded by 263,000 in November, well above the 100,000 jobs required just to meet the growth in labour force population. Wages growth remains around 5 per cent, reflecting a tight labour market. Together with ongoing strength in consumer spending and the services sector more generally, wages growth is inconsistent with inflation near 2 per cent.

At the sector level, materials jumped 14 per cent while banks and REITs rose 9.2 per cent and 7.2 per cent, respectively. Utilities and consumer staples rose more than 7 per cent while energy and retail lagged with returns closer to 3 per cent. For the year to date, energy has risen 51.2 per cent while at the other extreme, retailing and IT are down 29.4 per cent and 24.8 per cent, respectively. Stocks with EM exposure outperformed, rising 10.4 per cent as EM benefited from a gradual relaxation of China’s zero-Covid policy and policy support for the property sector.

EMERGING MARKETS

Emerging markets surged 14.8 per cent in November, the largest monthly gain since May 2009. Emerging markets are still down 19 per cent for the year to date in USD terms, 8.9 per cent in AUD terms.

The rally was based on two key drivers, a lower USD reflecting an unwinding of Fed rate hike expectations and an easing of China’s zero-Covid policy. The USD dropped more than 3 per cent in broad index terms in November after rising close to 10 per cent in 2022. As highlighted above, the Fed has been signalling a move to smaller rate hikes and this was supported by the lower-than-expected October inflation print, cementing the view that the Fed would “step down” in December. A lower peak in Fed funds and the prospect of easing by up to 150 basis points by end-2024 saw the USD suffer its largest monthly decline since May 2009. A lower USD typically benefits emerging markets.

Following rumours of an imminent easing in China’s strict zero-Covid policy and despite a surge in cases, on November 11 China announced a series of measures to relax its Covid restrictions including a shortening of the quarantine period from 10 days to eight days and making secondary contacts no longer in scope for quarantine. On November 13, the banking regulator and the central bank issued a 16-point set of internal directives to promote the “stable and healthy development” of the property sector.

Measures announced include credit support for heavily indebted developers, financial support to ensure completion and handover of projects to homeowners, and assistance for deferred-payment loans for homebuyers. Hopes of a less onerous Covid policy, together with measures to ease the pressure on property developers saw the Chinese equity market rise almost 30 per cent during the month.

AUSTRALIA

The Australian equity market tracked global markets in November, rising 6.6 per cent, taking the year-to-date return into positive territory at 2.2 per cent, well ahead of global markets hedged or in AUD terms, which are down 13.6 per cent and 7.4 per cent, respectively.

The stronger relative performance of Australia reflects a less aggressive policy setting and a superior economic and earnings growth backdrop. The structure of the Australian equity market has also been a positive given its heavy weighting to banks and materials, both of which have benefited from higher commodity prices and rising bond yields, and low weighting to IT. In the MSCI Australia index, financials have a 33.6 per cent weighting, materials 23.4 per cent and IT 2 per cent compared with the MSCI World index with a 14 per cent weighting to financials, 4 per cent to materials and 21 per cent to IT.

The materials sector rallied 16.3 per cent in November, reflecting a 20.5 per cent surge in iron ore prices in response to an easing of China’s Covid policy and against a backdrop of stronger emerging markets. Materials have risen 14 per cent in 2022. The bank sector was up just 1.5 per cent for the month although for the year to date the sector is 9.8 per cent higher.

The headline monthly CPI rose 0.3 per cent in October following a run of 0.5-0.6 per cent outcomes in 2022, taking the annual rate down to 6.9 per cent from 7.3 per cent. Taking the gloss off the better-than-expected result was the fact that electricity cost increases were not recorded during October. In other news, house prices continue to drop, down seven months in a succession, or 7.7 per cent off the peak. Dwelling approvals and finance also trended lower. The NAB business conditions index remains at solid levels while business and consumer confidence remain soft.

ASSET CLASS RETURNS (LAST 12 MONTHS)

The above graph summarises the performance of the major financial markets and gives you an indication of how these markets performed over the last 12 months. The graph does not reflect your actual portfolio performance.

*Source Zenith Investment Partners