November monthly investment update – Reflections on October 2024

In this update, Wesleyan’s Director of Investments, Martin Lawrence explores everything from the forthcoming US presidential election to the UK budget, and why UK interest rates may fall less in 2025.

Investment market movements in October were driven primarily by political events during the month. From parliamentary elections in Japan to the campaign ‘ebbs and flows’ in the ’knife edged’ run-up to the US presidential election, along with the first Labour Budget for 14 years here in the UK - there was certainly plenty for investment markets to digest.

Following the somewhat surprising half-point cut to US interest rates in September by the Federal Reserve (the Fed), the publication of the minutes from that meeting showed that not all committee members were fully behind the sizeable cut, which, it seems, has cooled expectations for further ‘big’ reductions in the final two months of the year. However, more modest cuts could be on the cards before the year is out.

A very strong US job market report at the start of October poured further cold water on those ‘expectations’ as the Fed would not want to risk stoking wage inflation which could ultimately push prices higher in the US economy.

US job data is now becoming harder to interpret due to the likely distortions caused by the recent hurricanes that tore across the US south-east in October, and the three-day US port strike in late September, which saw tens of thousands of dockworkers striking at major ports across the country. That said, it does appear as if US job adverts are still falling and fewer people are quitting their jobs - both of which suggest some labour market weakness is now emerging and therefore, wage growth could settle down (potentially reassuring the Fed) given time.

Other global news

Economies in Europe still look weaker compared to the US, and inflation returned to the European Central Bank’s (ECB’s) 2% target in October (albeit a rise from the 1.7% temporary drop we saw in September). The ECB was therefore able to cut their (benchmark) deposit interest rate, as expected, in October, by 0.25%. But politics yet again dominated, as France’s new Prime Minister (Michel Barnier) found himself in the spotlight after reporting that the country’s budget deficit would be higher than expected - helpful in explaining why French government bonds have underperformed their German counterparts so far this year over concerns for their fiscal position. By contrast, Spain has been a ‘bright spot’ in Europe this year and their economy provisionally grew by 0.8% in quarter three.

At the beginning of October, China was gearing up for its annual National Day ‘golden week’ – a seven-day public holiday that marks the biggest week of travel for its inhabitants. As China’s population enjoyed some downtime, global investment markets were suffering volatility as investors grew impatient that the country’s domestic economic stimulus packages were not forthcoming. However, China reported that their economy had grown by 0.9% in quarter three, which is an improvement on the prior quarter, but still falls well short of their historical growth record.

Budget announcement in the UK

Of course, politics took centre stage in the UK too, in the form of Chancellor of the Exchequer, Rachel Reeve’s first budget statement from the Labour government. The increases in spending, over and above the increases in taxation, have added to the UK’s borrowing requirement for the next few years at least.

The additional supply now required of UK government bonds (known as gilts) to finance the Chancellor’s new plans forced down their prices post the budget announcement, making it more expensive for the government to borrow from investors (meaning the yield on those gilts moved higher). As an example, the yield (or borrowing cost) of the 10-year government bond was 4.25% just before the Chancellor’s budget speech, but rose to 4.5% within 24 hours as the true implications were digested by investment markets. Having bought longer-dated gilts earlier on this year, we still believe there is good long-term value in UK government bonds at these prices, and are likely to make further purchases for our funds if yields move up closer towards 5%.

It should be noted though that rising government bond yields are not unique to the UK. Big events, like the US presidential election (5 November), and further escalation in the Middle East conflict, have the potential to increase inflation on the global stage (through trade tariffs imposed by other countries, or supply chain bottlenecks). Therefore, some of the rise in UK yields can be attributed to such wider factors.

Overall, UK interest rates may now fall less fast throughout 2025, than markets were originally anticipating prior to the budget announcement. With this in mind, we look forward to the Bank of England’s interpretation of the budget, which will no doubt play out at future meetings. Our thoughts are that we don’t think it will stop the bank from making small cuts to rates from the current (still relatively high) levels.

Whilst politics in the main, have taken centre stage in recent weeks, it’s worth highlighting that October and November fall right in the middle of the third-quarter company reporting season, so there’s a lot of additional information for investment markets to digest, too.

Bond returns were negative in October and the UK stock market fell too (partially impacted by the UK budget). Overseas markets, notably American shares, fared better during the month - but some of this outperformance was simply down to a 4% rise in the US dollar relative to the pound in October, which boosted the translation of local US returns. In a year where some assets have performed notably better than others, carefully selecting investments for the future now feels particularly important. Something we can identify with as long-term investors.