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October proved to be a challenging month for most asset classes as geopolitical risks rose and concerns about ongoing inflationary pressures persisted.   On October 7^th, the Hamas attack on Israel marked the largest scale assault on Israel since the Yom Kippur War in 1973. Since then, the conflict has intensified with an Israeli ground invasion in Gaza and there are concerns that further escalation could draw in other countries from the Middle East. 

In addition to Israel-Hamas conflict, rising bond yields and the likelihood of ‘higher for longer’ interest rates also weighed heavily on market sentiment.  In the UK, inflation remained stubbornly high coming in at 6.7%, the highest rate in G7 countries.  While a fall in food prices offered some respite, this was offset by increasing diesel/petrol prices which left the inflation rate unchanged from September. Despite this, there was a slight drop in core inflation (which excludes food & energy costs) and the Bank of England decided to hold the base rate at 5.25% while downgrading their 2024 growth forecasts.   Looking to North America, headline inflation has been trending lower with the consumer price index falling to 3.7%.  That said, growth prospects have remained surprisingly resilient with the economy posting Q3 GDP growth of 4.9% (annualised).  Combining this with a healthy job market, investors are concerned that the Fed may not be finished hiking interest rates.

Turning to equity returns, there was no place to hide with both developed and emerging markets recording losses over the period.  The UK was one of the worst performers with the FTSE All Share down 4.2% over the month.  A trend we continue to see is the relative underperformance of small and midcap UK companies with the FTSE 250 falling 6.3%.  These companies have been negatively impacted by rapidly rising interest rates and the high inflation we are experiencing.  While this has been a challenging environment, many UK managers state the valuations on offer are the most compelling they have seen which should present good investment opportunities for long-term investors.  Asia and Emerging Markets stocks were also negatively impacted despite the Chinese economy posting a stronger than expected GDP growth figure of 4.9% for the 3^rd quarter.

With the expectation of future interest rate hikes from central banks going forward we saw both corporate bonds and government bonds deliver negative returns. Our preference for short dated investment grade bonds helped not only protect against this volatility but also delivered positive returns.

Within alternatives, commodities returns were mixed in October. Oil prices surged following the outbreak of the conflict only to retreat to lower levels as signs of demand started to slow and supply increased off the back of the US lifting sanctions on Venezuelan exports.  While the situation in Israel/Gaza did not materially impact oil prices this is a fluid situation and something to monitor as the conflict unfolds.  Gold performed well as investors gravitated toward ‘safe haven’ assets. Rising interest rates remain a headwind for the real estate and infrastructure sectors which declined over the period.