Summary:
- Accommodative monetary policies by most global central banks remain in place, with the European Central Bank taking additional steps to aid the eurozone’s recovery.
- Global fixed-income markets dipped, with emerging market debt retreating much more than investment-grade bonds.
- Global equities generally gained, led by the traditional growth sectors of health care, information technology and consumer discretionary.
Economic Backdrop
Accommodative monetary policies by most global central banks remain intact, with the European Central Bank (ECB) taking further steps to aid the eurozone’s recovery. In early November, the ECB announced a reduction in its lending rate of 25 basis points to 0.25%, while the interest rate on the marginal lending facility, which provides overnight credit to institutions, was also lowered by 25 basis points to 0.75%. Falling price pressures were specifically cited as reason for the changes in policy, as regional inflation rates are below 1.0%. The U.S. Federal Reserve (Fed) Open Market Committee (FOMC) remained committed to its low interest rate policy and bond buying programme ($85 billion per month), but recent Fed meeting minutes indicated the central bank could potentially slow its asset purchases early in 2014. The Bank of England (BoE) made no changes in its interest rate policy (current rate at 0.5%) and bond purchases, with a continued eye on an unemployment threshold of 7.0% to consider changes. Expansion of the monetary base also continued at the Bank of Japan, which remained firm in its commitment to its aggressive economic stimulus programme.
Economic activity across the eurozone appeared to soften during the month. The economy expanded by a meagre 0.1% in the third quarter of 2013. This was in line with expectations, but slower than the 0.3% rate seen in the second quarter of 2013. An initial estimate of third-quarter economic growth showed that France may be in danger of slipping back into recession, while Germany exhibited slow-but-continued growth in the same period. The initial estimate of eurozone consumer price inflation for November was higher than expected (0.9%), but remains well within the ECB comfort zone, providing justification for the interest rate cut. Unemployment came in better than expected in October (12.1%). However, youth unemployment remained high in several nations, most notably in Italy and Spain.
U.K. economic activity increased in the third quarter with gross domestic product increasing 0.8%, as improvements in housing and business investments contributed. U.K. home prices continued to rise in November and were up 6.5% from a year ago, slightly better than consensus expectations. The Purchasing Managers Index (PMI) for the U.K. service sector jumped to a 16-year high in October, according to Markit, remaining firmly in expansion territory. The figures should be supportive of both economic growth and hiring in the months ahead. The number of unemployed claimants declined in October by more than expected. Despite this improvement, the country’s unemployment rate held steady, while average earnings were up by less than expected. The latter two reports suggest that recent labour-market improvements will not likely cause inflation.
The U.S. economy continued to show slow but steady growth. The Bureau of Economic Analysis’ first estimate of third-quarter economic growth was 2.8%, much better than expected and an improvement on the second quarter’s final estimate of 2.5%. Industrial production fell marginally in October, as indicated by the Fed, although manufacturing improved slightly. Capacity utilization held at levels that indicate low inflation risk. Markit reported that its PMI for the U.S. services sector rebounded strongly in November to one the highest levels since early 2012. The American consumer continued to hold up well, with retail sales rising more than expected in October, according to initial estimates from the Commerce Department. Nonfarm payrolls increased by a stronger-than-expected 204,000 in October, the third largest increase of 2013. The unemployment rate, however, rose slightly to 7.3%, but this may have been driven by federal workers on temporary furlough.
Market Impact
Global fixed-income markets dipped in November, with emerging market debt retreating much more than investment-grade bonds. U.S. high-yield bonds were one of the few areas to generate positive results, as healthy corporate fundamentals and yield-focused investors continued to support the asset class. Within investment-grade bonds, global Treasury bonds lagged as yields on the longer end increased as prices declined. In general, corporate bonds modestly fell in value, while specific areas within the securitized markets—asset-backed securities and commercial mortgage-backed securities—posted positive results.
Global equities generally gained in the month, as developed market equities posted positive results and emerging-market equities declined. Based on the MSCI AC World Index, sector performance was led by the traditional growth sectors of health care, information technology and consumer discretionary, while the more cyclical areas of materials and energy lagged. Across developed market equities, U.S. stocks posted some of the strongest results, while Asian equities (ex-Japan) lagged. In emerging markets, South East Asian countries lagged.
IQ’s View
The upward trend in global equity prices has continued. Inflows came from nearly all developed equity markets, while emerging-market equities lagged. Despite challenging global growth, the sustained rally in developed equity markets has resulted in valuations appearing fairly priced. As a result, we continue to fear a mild-to-moderate price correction in equities.
Optimism about a sustainable recovery is prevalent in Europe, with the U.K. exhibiting unexpected strength. We believe the U.K. looks less prone to a major slowdown than Europe. The U.K. and U.S., in our view, look very similar in terms of potential growth at this point. Europe is trailing, impacted by the fact that the ECB has only recently eased its monetary policy. Credit remains tight in the eurozone. We continue to expect weakening in the euro, as well as the Japanese yen, as a means of providing a spark in growth.
In addition, our view remains favourable toward emerging-market equities, at the expense of U.S. large-companies equities. Emerging markets have suffered sharp price declines, not just in the year-to-date, but also over the past two years.