“Individuals who cannot master their emotions are ill-suited to profit from the investment process.”
–Benjamin Graham; author of The Intelligent Investor
Global Market Overview
After retreating in September, stocks regained momentum throughout October with many equity indices reaching new highs during the course of the month. Shares were buoyed by strong earnings and increased risk appetite as US congressional leaders pushed towards a robust spending package. Over 80% of companies beat earnings expectations, which helped to drive the S&P 500 to a new peak. Chinese indices also rebounded, in part thanks to progress in the beleaguered property sector.
Yet the combination of persistent bottlenecks in the global supply chain and booming energy prices drove concerns around prolonged inflationary pressures, leading markets to price in a faster pace of tightening from central banks across the world. The 10-year US Treasury yield hit a high of 1.7% over the course of the month, but much larger increases in shorter-dated yields caused interest rate curves to flatten in several regions.
The major US indices all closed October in the green, reaching record highs during the month as companies reported solid results despite global supply chain issues. The S&P 500 gained +6.9%, the Nasdaq surged by +7.3% and the Dow Jones rose +5.8%. Growth stocks stepped on the throttle in October, with the Russell 1000 Growth Index up +8.4%, while the value stocks index climbed +5.1%.
Congress managed to avert a debt ceiling crisis, announcing a new deadline in December. US president Joe Biden made progress on his infrastructure spending proposals, announcing a framework for new legislation that appears to have the broadest support yet from across the Democrat party. Further changes may yet be required for the spending plans to be passed into law.
US labour market data highlighted the impact of worker shortages, with wages increasing by a robust +5.5% year-on-year. The labour force declined last month and participation rates remain below their pre-pandemic peak, despite the end of generous unemployment benefits. On the positive side the unemployment rate fell to 4.8%.
US GDP growth of +2.0% year-on-year for the third quarter disappointed, hurt by a combination of negative effects from Hurricane Ida and persistent supply-side distortions. Overall, the US recovery is solid and the economy is approaching full employment with inflationary pressures building. Consequently, it appears highly likely that the Federal Reserve will announce the start of tapering in November with a view to ending bond purchases by mid-2022. A gradual hiking cycle could then start towards the end of next year.
United Kingdom & Europe
The UK’s FTSE 100 Index closed last month +2.1% higher. In UK economic data, after slowing by -0.1% in July, GDP returned to growth in August, rising +0.4% month-on-month, although this was still slightly below expectations. The UK economy recorded rapid expansion during the first half of 2021, buoyed by the fast initial rollout of COVID-19 vaccines, but growth has decelerated due to a wave of COVID-19 cases and global supply chain issues, which has been worsened in the UK by post-Brexit trade restrictions.
In Europe’s largest economy, Germany, the DAX jumped by +2.8%, while France’s CAC Index rose +4.8%. On the macro side, economic growth in Europe is still suffering from a loss in momentum. This is most notable in Germany, where automotive sector weakness driven by semiconductor shortages is weighing on industrial production. Excluding the auto sector, the trajectory of Eurozone industrial production is back above pre-pandemic levels. Eurozone inflation hit a new 13-year high in October on the back of surging energy costs, with headline inflation coming in at 4.1% year-on-year.
Emerging Markets & Commodities
China’s Shanghai Composite Index closed marginally down in October (-0.6%), as worries over debt issues in China’s property sector continued to weigh on markets. The property sector accounts for approximately 29% of China’s GDP. Investors’ attention is focused on how Chinese authorities will manage regulations in the real estate sector to control spill-over risks. Hong Kong’s Hang Seng Index rose by +3.3% for the month.
China’s real GDP growth decelerated in the third quarter to +4.9% year-on-year. On the positive side, retail sales grew by +4.4% and exports rose by +28.1% year-on-year, thanks to rebounding demand from developed markets. The goal of a +6% annual growth rate, set by the Chinese Government at the beginning of the year, still seems attainable thanks to the strong start to 2021.
On the commodity front, oil prices jumped over +10%, registering a seven-year high price of $85 during the month as consumption outpaced supply, draining stockpiles. Oil has been a leader in the commodities space as the recovery from the pandemic continues to drive increased energy usage. Gold rose by +1.5% during October, while iron ore declined by -8.4%. Platinum and palladium increased by +5.7% and +4.8% respectively.
South Africa’s JSE All-Share Index followed global markets higher during October. Its +5% gain was driven by strong performances from mining shares, as well as Prosus and Naspers. Prosus recorded an impressive +11.2% monthly gain and Naspers +3.9%. Heavyweight brewing company Anheuser Busch InBev surged +8.1% and luxury goods giant Richemont soared +20.9%. The rand depreciated against the US dollar by -1.1%.
In local economic data, September annual headline inflation came in at 5% year-on-year. The increase was again largely driven by the food and beverages, housing and utilities, and transport categories. South Africa was moved to Stage 4 loadshedding during the last week of October, as Eskom cut approximately 4,000 megawatts from the national grid.
Since 1950, November has been the best month for market returns. It is likely that we could see new highs in November if history repeats itself. The upcoming holiday shopping season and remainder of corporate earnings should support share prices into year-end. With vaccination rates improving in many countries, investors are focusing their attention towards the post-pandemic process of normalisation. Persistent supply chain constraints are weighing on the path of the recovery and feeding fears of longer-lasting inflationary pressures. Despite this dynamic, we view the prospect of economic stagflation as unlikely. Stagflation is persistent high inflation combined with high unemployment and stagnant demand in a country’s economy. The global growth outlook remains firmly underpinned by huge levels of pent-up demand and solid corporate balance sheets.
Fund and Portfolios Overview
The Iza Global Balanced Fund gained +2.0% for the month (returns in GBP), while the Iza Global Equity Fund advanced +2.3% and the Iza Stable model portfolio edged up +0.7% for October. The major contributors were Scottish Mortgage (+5.1%), Smithson (+3.3%) and Catalyst (+4.2%), while the remaining holdings were primarily flat for the month.
Towards the end of October, the Lindsell Train Global Equity Fund was replaced by the Liontrust Sustainable Future Global Growth Fund. The Liontrust fund management team selects superior stocks by identifying companies with strong and dependable growth prospects within 21 sustainable infrastructure themes, that are contributing in different ways to creating a cleaner, healthier and safer planet. Some themes include the efficient use of energy, improved management of water, connecting people, providing education, transport safety, building better cities, healthcare innovation and digital security. Finally, robust analysis is conducted to select only those companies positioned to deliver high returns on equity. The Liontrust fund has been a top performer in its peer group, returning an annualized +19% over the past 5 years, while maintaining comparable volatility levels as measured by standard deviation.