Summary
Global equities rallied in November amid optimism that central banks have reached the end of their tightening cycles. The US 10-year Treasury yield declined sharply.
Market update
Equities: Global equities snapped back in November, with the MSCI World index rising over 9% in USD terms amid optimism that central banks have reached the end of their tightening cycles. The US Treasury 10-year yield declined sharply from over 4.9% at the end of October to just over 4.3% at the end of November. Global growth and technology stocks outperformed value. Within Developed Markets, Europe and the US outperformed during the month in USD terms; Tech-heavy Taiwan benefited from falling yields and Korea also rallied. China underperformed although it posted a positive absolute return.
Fixed Income: Government bond yields generally declined in November. The yields on the US Treasury 2-year, 5-year and 10-year notes fell by 41 bps, 59 bps and 90 bps to 4.68%, 4.27% and 4.33% respectively. Other fixed income markets also gained from lower yields; the US High Yield market (proxied by ICE BofA US High Yield Constrained Index) returned 4.57%. Asian Credit (proxied by the JP Morgan Asia Credit Index (JACI)) registered its highest monthly return in 2023, generating 3.69%, boosted by positive returns from both Investment Grade and High Yield bonds.
Macro overview
Growth: Global growth held up stronger than expected in 2023, bolstered by the US economy. However, the positive momentum in the global economy is likely to trend lower in 2024. The recent higher equity valuations and bullish investment sentiment (as measured by the AAII survey and Ned Davis Crowd Sentiment indicator) seemingly reflect market participants’ expectations of a ‘soft landing’. In our view, a US recession (albeit a mild one) remains probable over the next 6-12 months. Although US pandemic savings are winding down (i.e., buffer from excess savings is fading), strong household and corporate balance sheets plus room for the Fed to lower rates should help the US economy to better navigate the recession.
Inflation: US Consumer Price Index rose 3.1% in November, in line with expectations. This helped to alleviate some pressure on the Fed and while still some ways from its 2% target, the disinflation trend is likely to persist into 2024. Overall, our view remains that inflation is likely to head lower.
Monetary Policy: The Fed kept policy rates steady at its final meeting of 2023 in December. We believe that as inflationary pressures continue to ease, global central banks are probably near or at the end of their rate-hiking cycles. However, they are likely to be cautious about declaring victory over price increases too quickly. Although much attention has been given towards potential rate cuts in 2024, significant policy easing is unlikely without a recession, especially if the still tight labour market poses some upside inflation risk.
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