In November, softening inflation prompted the Bank of England and the US Federal Reserve to maintain interest rates. However, Federal Reserve Chair Jerome Powell's remarks on the robustness of the US consumer and small business balance sheets suggested that the era of rate hikes might not be over. Adding to the mix, Moody's let off a firework, downgrading the US outlook due to the country’s escalating deficits. Simultaneously, Japan's economy unexpectedly faltered in Q3, and China's exports stumbled.

Cooling inflation saw Growth outpace Value as an investment style, giving a boost to tech stocks. Bond prices surged and yields declined, overshadowing commodities, which grappled with slowing growth and weakened Chinese demand. Notably, gold shined, defying the downward trend in commodities. Amidst these fluctuations, REITs found a silver lining as government bond yields nosedived, offering them some much-needed relief.

Regions

The Bank of England opted to maintain its interest rates at the current level of 5.25%⁽¹⁾. This decision was substantiated by recent data indicating a softening trend in inflation, economic growth, and the UK labour market. Governor Andrew Bailey conveyed an expectation for these rates to persist for an extended duration, with a vigilant focus on evolving inflationary pressures. In a noteworthy development, the decline in energy prices contributed to a decrease in inflation to 4.6%⁽²⁾, marking its lowest rate since November 2021, getting the UK government within its target of halving inflation from the start of the year by year-end. Contrary to the previous six months, home sales experienced an upturn in October. According to Halifax, this surge in October is attributed to a shortage of housing supply, suggesting a cautious stance among potential sellers. Nevertheless, home prices remain below the levels observed a year ago. Later in November, Rightmove reported a further decline in prices, marking the sharpest November drop since 2018.

The US Federal Reserve (Fed) maintained interest rates for the second consecutive month in November. Despite this decision, Fed Chair Jerome Powell noted that consumer and small business balance sheets appeared more robust than initially anticipated, in a signal that leaves the door open for further rate rises should they be deemed necessary. The third quarter witnessed a moderation in job gains, although the overall employment situation remained robust. The unemployment rate, currently at 3.9%⁽³⁾, exhibited a slight increase, while inflation continued to surpass the central bank's 2%⁽⁴⁾ target, albeit continuing to trend lower. Interestingly, consumer spending declined in October, despite the Fed's belief in the strength of consumer balance sheets. Household debt in the US reached a new record during the period. Moody’s, the credit rating agency, downgraded the country's outlook to negative from stable, citing higher interest rates without effective fiscal policy measures.

Euro Zone inflation sank below expectations and to within a whisker of the European Central Bank’s (ECB) inflation target, giving some hope that a rate cut could be on the horizon before the summer of 2024.

Japan's economy contracted more than anticipated in the third quarter following robust growth in the previous quarter.

In China, October's exports fell considerably more than consensus forecasts, while imports surprisingly increased, signalling some resilience in domestic consumption. Retail sales and industrial data in China also outpaced expectations. Russia's economy exceeded expectations, growing 5.5%⁽⁵⁾ year-on-year in Q3. Conversely, Argentina experienced a substantial annual inflation jump of 142.7%⁽⁶⁾, ahead of elections in the region. In Turkey, the central bank unexpectedly raised interest rates by 5%, double the market expectation, lifting the bank rate to 40%⁽⁷⁾.

Assets

In November, Growth outpaced Value as an investment style and technology stocks experienced a resurgence. The Nasdaq 100 recorded a notable increase of 6.22%⁽⁸⁾, while the MSCI ACWI Information Technology and Communication Service Index also saw a boost, returning 8.84%⁽⁹⁾. Despite these gains, real estate emerged as the standout asset class, overshadowing equities.

Regionally, Latin America took the lead as the top-performing region, with the MSCI Emerging Markets Latin America Index returning 9.27%⁽¹⁰⁾. Europe ex UK followed, recording one of its best months since January with the MSCI Europe ex UK Index posting a return of 6.25%⁽¹¹⁾, trailed by the US and the S&P 500, which returned 4.54%⁽¹²⁾. Latin America faced the impact of regional central banks lowering rates after an earlier hike, contrasting the approach of developed market central banks. Notably, China emerged as the sole region with a negative return, largely attributed to the ongoing challenges in Chinese property stocks, although some regional fund manager experts expressed growing optimism about opportunities in the region. The MSCI China Index returned -5.48%⁽¹³⁾. Equities as an asset class represented by the MSCI World Index returned 4.84%⁽¹⁴⁾.

Bonds experienced a relief rally as softer inflation data prompted a decline in yields. The yield on the US 10-year, which started at 4.87%⁽¹⁵⁾, concluded the month lower at 4.35%⁽¹⁶⁾. Similar patterns were observed in German 10-year Bunds, Japanese 10-year JGBs, and UK 10-year Gilts. Investors found solace in the belief that central banks might halt the trajectory of rising rates and borrowing costs, reflected in the Bloomberg Global Aggregate index's return of 0.69%⁽¹⁷⁾.

Conversely, commodities emerged as the worst-performing asset class in November. The downward trend was influenced by the anticipation of slower US growth in 2024, causing oil prices to continue their descent from the year-high in September. Additionally, China's weakened demand and a global growth slowdown contributed to the overall decline in commodity prices. Precious metals, particularly gold, defied this trend, knocking on the door of its all-time high, returning 2.45%⁽¹⁸⁾ in US dollar terms. This rise was supported by falling bond yields and a weakening dollar. However, the strengthening of Sterling against the US dollar left UK investors with a loss, as reflected in the LBMA Gold Bullion Sterling Troy Ounce Index, which returned -1.98%⁽¹⁹⁾.

Real Estate Investment Trusts (REITs) found relief in November as yields on 10-year government-issued bonds across developed markets fell. This shift was prompted by optimism that peak rates had been reached, offering investors respite from the persistent uncertainty surrounding China's real estate and the associated risks of contagion. The MSCI ACWI REITs index returned 7.66%⁽²⁰⁾, reflecting this positive turn of events for real estate investors.

Considerations for long-term investors

With gold once more nearing all-time highs we look at the advantages and disadvantages of holding gold in an investment portfolio.

The appropriateness of including gold in a portfolio depends on several factors such as an investor's financial goals, risk tolerance, and overall investment strategy. Holding physical gold can provide some diversification benefits when added to a portfolio of assets like shares and bonds. Over time it can help reduce overall portfolio volatility. Gold is also often considered a hedge against inflation helping preserve purchasing power. Gold also has other long-term advantages. For instance, during times of economic uncertainty or geopolitical turmoil it is often considered a safe-haven asset due to its scarcity, and perceived value over the long term.

However, gold also has its disadvantages. For example, it does not generate income like dividend-paying shares or interest-bearing bonds. Its value is primarily driven by changes in supply and demand dynamics. Therefore, it can be volatile, and short-term fluctuations may impact the overall portfolio value. Moreover, holding physical gold requires secure storage, which can incur additional costs. This is particularly relevant for investors holding gold in the form of coins or bars. Albeit, this can be overcome by holding a physically backed exchange-traded commodity (ETC) fund.

When considering gold as a potential investible asset, investors should give some consideration to the pros and cons of owning the physical assets over holding shares in the miners that extract gold. An advantage of owning the physical assets includes not being exposed to company-specific risks, no dependence on operational risks, avoiding the influence of management decisions on performance, and a reduced correlation with equity markets. However, this can be flipped on its head as owning the shares in a miner provides the investor with the potential for dividends, leverage to gold prices and exposure to company-specific growth.

Sources:

1. Bank of England Bank Rate, bankofengland.co.uk 30/11/2023

2. U.K. Consumer Price Index (CPI) YoY, Investing.com. 30/11/2023

3. U.S. Unemployment Rate. Investing.com. 30/11/2023

4. Federal Reserve target inflation rate. Federalreserve.gov. 30/11/2023 5. Russia Gross Domestic Product (GDP) Quarterly YoY. Investing.com. 30/11/2023 6. Argentina Consumer Price Index (CPI) YoY. Investing.com. 30/11/2023 7. Turkey One-Week Repo Rate. Investing.com. 30/11/2023

8 - 14. FE Analytics, price spread bid to bid in pounds sterling (for the period 31/10/2023 - 30/11/2023), 01/12/2023

15. U.S. 10 Year Treasury. Cnbc.com. 30/11/2023

16. U.S. 10 Year Treasury. Cnbc.com. 01/12/2023

17. FE Analytics, price spread bid to bid in pounds sterling (for the period 31/10/2023 - 30/11/2023), 01/12/2023

18. Gold COMEX, @GC.1:CEC:Commodities Exchange Centre. Cnbc.com 01/12/2023

19 - 20 FE Analytics, price spread bid to bid in pounds sterling (for the period 31/10/2023 - 30/11/2023), 01/12/2023

Date of publication: 1st December 2023