Posted on: 13 November 2015 by James Humphreys
October saw the equity market recover some of its summer losses as investors became more risk seeking. Macroeconomics has continued to dominate market moves, with some better economic data and fluctuating expectations of when the US Federal Reserve (Fed) will finally raise interest rates. It has been a busy month for corporate reporting, which has been very mixed, although the general trend has been for companies to meet analyst expectations that were cut back substantially over the summer. Now that company reporting is drawing to a close, attention will return to the timing of an interest rate increase in the US and slowing growth in emerging markets.
Despite finishing the month up 5.2%, the UK's large company index continues to underperform international peers, with its high weighting to commodity-related sectors and banks depressing its performance. However, medium and smaller companies also lagged behind their international cousins, with a number of more domestically orientated stocks issuing disappointing earnings guidance. With the UK housing market and wider economy now growing at a slower pace, high valuations on some of these sectors (such as housebuilding) may prompt some profit-taking by investors who have enjoyed a strong run.
The oil price rallied from its lows during the month, with US oil inventory data surprisingly low, suggesting higher than expected demand. This very large UK sector managed a 10.4% return in the month. Basic resources, including mining, also bounced back with a 7.8% return. The banking sector was a laggard due to some poor results and managed just a 0.9% increase.
In international equity markets, Japan enjoyed a strong rally, up 7.9%. The US also did well, up 6.1%. At the start of the month, the release of the minutes from the September Fed meeting convinced the market that a rate increase had been pushed back to next year and added momentum to the equity rally. Paradoxically, the next batch of Fed minutes at the end of the month were also received positively, but were actually more hawkish and left open the possibility of an interest rate increase in December.
Gilt markets gave back some of their summer gains, and bonds in general began to price in the possibility of a December interest rate increase by the Fed. However, bonds in Europe remained in demand as President of the European Central Bank (ECB), Mario Draghi dropped clear hints that the ECB may extend their bond buying programme in December as the Eurozone attempts to stave off deflation.
The market action during October was almost universally bullish, with investors responding to all news, whether bad or good, in a positive frame of mind. This has been underpinned by some improved economic data and corporate reporting that was better than depressed expectations. However, it is worth noting that market trade volumes have been light, so there has been a lack of conviction in the rally. November should be a less exciting month and all eyes will be on the Federal Reserve as we await the December interest rate decision.
All data has been compiled by Duncan Lawrie from sources believed to be reliable. Full details of sources are available on request.
Information provided in the above articles and any opinions expressed are for general use only. You should always take specific advice to suit your personal circumstances before taking any action. Errors and omissions excepted.
The value of investments and income generated may fall as well as rise, and investors may not get back the amount invested. Past performance is not a reliable indicator of future results.