Global financial markets were more settled in October after a rare three successive quarterly declines. Many
equity markets were even up and bond yields down as the relentless stream of negative news seen
throughout the year abated slightly. The acuteness of risk aversion came out of markets and there was more
belief among investors that the balance of risks was on a steadier footing following significant sell offs year
to date. Some evidence emerged that inflation could at least be increasing less rampantly and even the UK,
where the disruptions under Prime Minister Liz Truss’s administration had spurred surprisingly far-reaching
unease around markets, was looking more stable after Rishi Sunak’s succession.

US Big Tech disappoints investors
In the US, the S&P 500 rose throughout the month after three quarters that saw it suffer its longest run of
quarterly losses since 2008. Latest data had shown that CPI including energy and food was 8.2% in September,
or little changed from the 8.3% figure announced in August. The market had to weigh up whether the Federal
Reserve would need to be even more aggressive to tackle inflation.

The first estimate of US Q3 GDP growth came in at up 2.6% year-on-year after having contracted in the first
half of the year. The figure masked the fact that consumer demand was weakening, however, pointing to a
slowing economy. There were other signs that the Fed’s aggressive measures to cool the economy were
working: figures showed that US job vacancies fell by more than one million in August. US business activity also
fell, with the Purchasing Managers’ Index from S&P Global dropping to 47.3 from 49.5 in September and below
expectations. A number above 50 denotes expansion when compared to the previous month. The hope is that
the Fed will be able to engineer a soft landing and the US economy has made progress towards this.

It was also Q3 reporting season in the US and although Apple rose nearly 8 per cent after announcing a year-on year
increase in revenues above expectations, several of the Big Tech groups delivered disappointing figures and
their shares fell. Bellwether stocks Microsoft and Google parent Alphabet both saw their shares drop after they
warned of future weakness.

US equities, which have been expensive although corrections have brought valuations back to more sensible, if not quite yet attractive levels. Value can still be found in the tech companies and the US economy remains in solid shape.

Lagarde points to recession in Europe
In Europe, the ECB raised interest rates by 75bp to 1.5%, the highest level since 2009, after Eurozone inflation
reached 9.9% in September. But bond markets rallied after Christine Lagarde, the ECB President, acknowledged
the bloc was likely to be heading for a recession, which investors saw as a sign that the ECB could be on the
verge of a pivot away from its hawkish stance. But data at the end of October showed Eurozone inflation had
reached 10.7%.

It is the region most at risk from the conflict in Ukraine and parts of the bloc are reliant on Russian energy. A fund manager in the sector believes the prospects of a recession in Europe is worsening: “Electricity prices have surged to more than 15 times the pre-COVID level,
stemming from droughts, cuts in Russian supplies and summer heat. Inflation in the EU is running ahead of
that in the US and this has increased the likelihood of a recession.”

Investors reassured by UK change
In the UK, financial markets took some reassurance that the political situation had calmed down and assets
recovered. UK Equities appear more attractive in the UK than Europe, having been discounted by
international investors since Brexit.

Japan intervenes to support the yen
In Asia, the Japanese government announced a Y29 trillion (US$200bn) new spending package to ameliorate the
impact of higher commodity prices and the weaker yen on consumers, as the Bank of Japan continues with its
ultra-loose monetary policy. The country’s inflation rate was much lower than other developed nations at 3% in
September. The BoJ has been intervening in markets since September to support the yen, which has sunk to 32-
year lows because of the country’s monetary policy versus tightening by other major central banks.

President Xi tightens grip on power
Elsewhere in Asia, investors were disconcerted by the news that President Xi Jinping tightened his grip on
power after being elected Chinese Communist Party leader for a third term and avoided appointing any pro-market
moderates in his leadership team. This sparked a major sell-off of Chinese companies in both Hong
Kong and the US that was given further impetus by new data showing that China’s economy grew by an
annualised 3.9% in Q3, some way below the government’ target of 5.5%. Emerging Markets generally have
been hit hard by the strengthening US dollar because they pay for their imports and debts in USD and are
vulnerable to a slowing global economy. An Emerging Markets manager  points out:
“Emerging markets are having a hard time due to the higher commodity prices, including energy and food. The
strong dollar is pushing commodity prices even further, making goods more expensive to the rest of the
world.”

Timing markets is difficult
As much as markets saw some recovery in October, the future returns on equities and corporate bonds will
depend on companies maintaining their robust earnings and financial strength, which will be closely linked to
the state of the economy. The pervasive sense of uncertainty still keeps us ‘neutral’ in terms of overall risk
positioning.

Optimistic investors might look at the current environment as a buying opportunity. They should bear in mind
though that timing market entries is nigh on impossible to get perfectly right. It may be that there is further
downside in markets, but it would be easy to miss out on the upturn when a sustained rally appears.

Please remember that past performance is not a guide to future performance and the value of an investment and any income generated from them can fall as well as rise and is not guaranteed, therefore you may not get back the amount originally invested and potentially risk total loss of capital.

This document should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice.