The scene observed in September in financial markets continued to play out over the month of October. Indeed, the period of volatility continued and equity markets lost nearly 3% in euro terms, while bond yields continued to rise.
Of course, risk appetite has also been affected by armed conflicts in the Middle East and corporate earnings reports that have not necessarily helped restore positive sentiment.
As has been the case for several months now, interest rates rose, fuelled by US economic figures that continued to demonstrate surprising resilience. Consumption and employment figures, two pillars of economic activity, remained very strong. Admittedly, manufacturing confidence surveys and real estate figures still lagged due to high central bank rates, but the rest of the economy, particularly services, continued to perform well.
The gap in economic performance between the US and Europe continues to widen. Moreover, the first estimate of third-quarter growth was in the green at 1,2% in the United States, while the figure was in the red in the Eurozone at -0,1%. The European economy, which is more dependent than the United States on bank financing and more sensitive to the global industrial cycle, is therefore particularly in difficulty.
Additionally, the positive news on inflation continued to flow on both sides of the Atlantic. Annual inflation dropped to 2,9% in the Eurozone and 3,7% in the United States. Admittedly, the 2% target set by the central banks has not been met, but the figures are moving in the right direction. Moreover, central banks seemed to be signalling the end of the rate hike campaign, given the hikes already carried out, the economic slowdown on the horizon and declining inflation.
In this downturn month, the stock market sectors that performed well were logically the most defensive sectors, namely Utilities and Consumer Staples, but also Technology, which regained some ground after a very challenging September.
Thus, after a 10% fall of equity markets between August and October, it seems appropriate to add risk to the portfolios. For this reason, we recommend raising the equity exposure from underweight to neutral as valuations are more attractive and technical indicators point to an “oversold” market. Added to this is the fact that recession scenarios are also being postponed, which in turn raises the profile of equity markets.
In sector terms, we reiterate our positive view on Utilities and Consumer Staples. Although these two sectors have indeed experienced specific difficulties, with a rise in rates for the former and the potential negative impact of drugs cutting appetite for the latter, a rebound can be expected as movements have been significant.
We therefore continue to believe that the environment is favourable for bonds, a segment on which we have a positive view. With the cycle of central bank rate hikes coming to an end, fixed income is becoming more attractive given the decline in inflation, whether or not it is accompanied by a recession. Both European and US rates have reached attractive levels, and their yields are likely to cushion the shock if rates continue to rise.
