SPW MarketWatch: October 2023

Source: FactSet, 3 November 2023. Figures are monthly price returns in local currencies for October 2023.

Israel-Hamas war

The conflict between Israel and Hamas is, above all, a human tragedy and the terrible human suffering is all too visible from the images we see in the news. So it may seem out of place to discuss the conflict’s economic and investment impact, but we have an inevitable responsibility to assess the economic effects of conflicts such as this.

One notable impact has been on the price of gold, which is often viewed as a safe haven in challenging economic times. The gold price rose by 7.4 percent in October, but had been falling in the days before the Hamas attack. Following the attack, the price rose sharply to reach an October peak of $2,010 (£1,652).

The impact on the oil price was more muted: it rose at the start of the conflict but then fell back to end the month down by 5.5 percent. This may simply reflect the fact that, despite its location in the Middle East, Israel is not an oil producer and that, as yet, the conflict hasn’t spread beyond Israel’s borders.

At Schroders Personal Wealth, we currently have a positive view on commodities, which we believe can provide some protection against inflation and geopolitical risks. Most notably, we have a positive stance on energy but a neutral view on gold.

Launch of four indices to measure bond market turbulence

On 13 October, four indices were launched with the aim of capturing investor expectations of turbulence in US and European corporate bond markets. These Credit VIX indices resemble the well-known VIX index, also known as the ‘fear’ index, which for 30 years has measured investor expectations of turbulence in the US stock market.

In effect, all of these indices attempt to provide a measure of market ‘nervousness’. The higher the level of one of these indices, the higher the expected market turbulence and the greater the degree of market nervousness.

These bond indices have been launched at a time when US government bond yields have reached around 5 percent, levels not seen since the Global Financial Crisis of 2008. Increasing US government indebtedness and high US interest rates have helped drive a fall in US government bond prices, and bond yields rise when their prices fall. Relatively high yields are also being seen in corporate bonds.

At SPW we have a slightly negative stance on government bonds. But we have a positive stance on corporate bonds. In particular, we believe European high-quality (investment grade) bonds could be well-placed to benefit if the European Central Bank (ECB) starts to end its cycle of interest rate rises.

Happy holidays for China?

October’s Golden Week, one of three week-long holiday periods in the Chinese calendar, offered some respite to a government struggling with a troubled property industry. Domestic tourism revenue during the holiday rose by 129.5 percent compared with the previous year. But this substantial rise reflects the fact that China was still undergoing Covid lockdowns in 2022. Even so, revenues were up by 1.5 percent compared with 2019, prior to the onset of Covid (1).

There was some other positive news as China’s economy grew by 4.9 percent in the third quarter of 2023 (2), which was above market expectations. But there were reports that Country Garden, China’s largest private sector property developer, could be heading for default after it failed to make a bond payment, adding to the country’s property woes (3).

We currently have a neutral view of emerging market equities (shares), which includes China. We also have a neutral stance on equities overall, despite resilient economic growth in the US.

Sources:

(1) The State Council, The People’s Republic of China, ‘“Golden Week” in China sees consumption boom’, 1 November 2023.

(2) National Bureau of Statistics of China, ‘Preliminary Accounting Results of GDP for the Third Quarter of 2023’, 20 October 2023.

(3) Financial Times, ‘How China’s property crisis has unfolded, from Evergrande to Country Garden’, 23 October 2023.