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30th November 2022
Cappuccino Commentary
A relaxed read on the issues of the day
In the UK, the departure of Liz Truss and her government during October was received favourably by markets. Following a volatile September, there was a sense of relief in markets with Jeremy Hunt replacing Kwasi Kwarteng. With Hunt planning to take a much more orthodox approach, UK bonds recovered and the positive returns across government and corporate bonds made the UK one of the few bond markets to post gains.
In the absence of similar political turmoil elsewhere, the dominant themes of high inflation, rising living costs, slowing economies and the looming threat of recession, presented investors with an abundance of challenges. Central banks continue to chase down inflation with aggressive interest rate rises, leading to falling bond prices.
Equity markets were something of a mixed bag, with Asia and emerging markets reflecting the headwinds China has been facing in particular. Covid lockdowns, geopolitics and trade restrictions on semiconductor sales between the US and China, all contributed to poor returns from the region, despite solid returns from Japan and Korea.
US equities were boosted by companies reporting strong earnings numbers, with similar resilience being noted in some UK stocks. However, at the company level there were also areas of weakness, with US technology businesses such as Alphabet, Meta, Amazon and Microsoft continuing to disappoint.
European equities stood out for their performance during the month. At the overall level the region was up, as was each sector in the region. This was in spite of inflation reaching double digits, forecasts of recession in 2023 and rising interest rates.
2022 has been an exceptionally difficult year for investors, but we have seen opportunities emerge, particularly in shorter dated bonds. Rising interest rates have put pressure on bond markets and we remain wary of this, although we believe we are through the worst of the pain. In equities, we have seen Chinese equities reach exceptionally low valuations, which could provide the basis for better performance going forward.