Has Christmas come early for equity markets & assessing fixed income opportunities

Spotlight: Autumn Statement Roundup

The Chancellor’s Autumn Statement focussed on economic growth and the improved fiscal situation in the UK. This was notably a result of better-than-expected growth levels and substantial real cuts in spending amidst rising inflation. The Office for Budget Responsibility (OBR) predicted borrowing to be £27 billion lower in the fiscal year 2027/2028 compared to March estimates. This surplus provided the Chancellor with an additional £27 billion, which he chose to spend in two ways. Firstly, in the form of National Insurance cuts and secondly in the form of a "super-deduction" for business investment. This represents a significant increase in both the generosity and visibility of tax benefits for businesses.
 
The OBR has significantly revised its assessment of the UK’s economic starting point and short-term outlook. The economy is now 3% larger than previously anticipated in March due to revised data, and the recession expected in March has been cancelled. However, the forecast growth numbers have been revised downwards, see chart below. At the same time, the Chancellor acknowledged success in meeting the Prime Minister’s pledge of halving inflation, despite there still being some way to go before the actual target is met. Universal benefit saw a 6.7% increase from April due to higher September inflation. The triple lock pension commitment was maintained, resulting in an 8.5% increase in state pensions from April. On Mansion House Reforms, the Chancellor emphasised efforts to consolidate the Defined Contribution and Defined Benefit pensions industry. Reforms in capital markets were modest, allowing savers to contribute to multiple ISAs and Long-Term Asset Funds (or LTAFs) from April. LTAFs enable investment in illiquid assets like private equity.


Source: OBR forecasts for GDP. (GDP = ‘Gross Domestic Product’. It is used as a measure of the size and health of a country’s economy over a period of time.)
 
Unsurprisingly, the Chancellor focussed his Statement on the good news, however, there were other less positive outcomes noted in the OBR’s report. In summary, these points outlined the lack of adjustments in tax thresholds, absence of inheritance tax modifications, potential impacts of increased inflation on taxes, and no alterations to ISA allowances.
 

The noise

• The “Santa rally” has come early this year, with the MSCI all-country world index up more than 8% in November alone, with market participants bombarded with positive economic data over the past four weeks. An early Santa rally can be attributed to inflation coming in under expectations across many developed markets, central banks signalling that interest rates have likely reached their peak, and developed market economies showing some signs of cooling, though importantly not enough to take them into a recession. November 2023 so far has been the best month for world equity markets since the Covid vaccine breakthroughs of late 2020.

• Japan’s core consumer price growth picked up slightly in October, reinforcing investors’ views that stubborn inflation may push the Bank of Japan to roll back monetary stimulus. Core CPI rose 2.9% year-on-year in October, the 19th consecutive month that inflation has hovered above the central bank’s 2% inflation target. The Bank of Japan has been happy to let prices stay above target, as they insist that the cost pressures are largely driven by higher global commodity prices and the weaker yen, not a result of sustainable price gains led by stronger wager growth and domestic demand.

• The European Commission, the EU’s politically independent executive arm has opened its 2023 Innovation Fund call for proposals for net-zero technology initiatives with a record budget. The €4 billion fund will look to support the deployment of innovative decarbonisation technologies in the EEA, with the budget funded by the EU Emissions Trading System, a system that requires polluters to pay for their greenhouse gas emissions. Projects will be assessed based on their potential to reduce greenhouse gas emissions, their degree of innovation, maturity, replicability and cost efficiency.

The numbers

GBP Performance to 23/11/2023

Source: Bloomberg, data as at 23/11/2023

The nuance

The global opportunity set for fixed income is much improved at present, following the sell-off in 2022 and continued weakness in 2023 (specifically from government bonds). Government bond yields across most developed nations have risen this year to levels not seen since 2007.

While much has much debate about the merits of a “60/40” strategy (a portfolio that allocates 60% to equities and 40% to fixed income securities), the outlook would now appear much improved as a function of the re-pricing in fixed income markets. While long-term investors may have losses in their bond portfolios, cash flows can now be reinvested at higher rates, which given enough time should improve returns. From a risk diversification perspective, the relationship of bond prices to changes in yields makes the portfolio less sensitive to rising interest rates when yields are higher. Put simply, a balanced 60/40 portfolio is arguably now more diversified than at any point in the last 15 years. 

As we're seeing a slowdown in the global macro environment because of slowing economic growth, higher for longer interest rates, and rising unemployment we would expect yields to come down particularly for longer-dated bonds as safe-haven demand pushes prices higher. This kind of ‘protection’ for multi-asset portfolios now comes at much better value than we’ve seen in the last few years.

All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.

Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.