November 2022 market commentary

With more positive news on inflation, markets enjoyed some gains in November, but China’s economy continues to suffer from the effects of Covid. While there were some promising climate-related outcomes from COP27, the progress made on cutting emissions was viewed as disappointing. 

November was a strong month for markets, with broad gains across equities and fixed income asset classes. This was a result of several factors, including signs that inflation momentum was beginning to ease across major economies and suggestions from China of a move away from its zero-Covid strategy. Emerging Market equities rallied with the Hang Seng (Hong Kong and China mainland stock exchange index) gaining 26.8%, its largest monthly return since October 1998. The FTSE All-World Emerging Market Index rose 11.1% over the course of November. Developed market equities also posted strong gains, with the Euro STOXX 50 returning 9.1%. The US market, represented by the S&P 500 index, gained 5.7%, and in the UK, the FTSE All Share Index finished the month up 5.4%. The FTSE World Index rose 5.7%, to bring losses to 12.5% on a year-to-date basis. Sovereign bonds posted solid gains with UK government bonds returning 2.9% as they continued to recover from the turmoil following the mini-budget, although remaining one of the worst performers year to date, having lost 21.6% since the start of the year.  

(All returns are sourced from FactSet and are reported as total return in local currency for the period 01/11/2022 – 31/11/2022)  

Inflation and monetary policy  

Equity markets soared and Treasury bond yields tumbled as October’s US Consumer Price Index, released on 10 November, was lower than expected. The index, a broad-based measure of goods and services costs, increased 0.4% for the month, below analyst expectations of 0.6%, and the slowest monthly growth in over a year. Whilst inflation is still a threat to the US economy, the number suggests pressures could be starting to ease. This led to the S&P 500 index having its best day since April 2020 and yields on 2 year Treasury bonds seeing their biggest daily decline since 2008. The report suggests the Fed may slow down the pace of interest rate hikes, with Fed Chair Powell commenting on the last day of the month: “the time for moderating the pace of rate increases may come as soon as the December meeting.”  

Positive inflation news also came out of the Euro area, with the November inflation figure easing to 10%, below consensus forecasts of 10.4%. The inflation figure slowed for the first time since June 2021, although President of the European Central Bank Christine Lagarde warned that Eurozone inflation has not yet peaked.   

In the UK, the Bank of England raised the Base Rate by 75 basis points to 3% at its November meeting. The Monetary Policy Committee gave clear guidance at the time that the market pricing of subsequent rate hikes was too high. Markets reacted calmly to the Autumn Statement on 17 November, which set out the government’s plans for £55 billion of fiscal tightening over 5 years. Following the Statement there was very little movement in UK government bonds, as investors were reassured by the government’s fiscal credibility after the moves triggered by the “mini budget.”  

China easing zero-Covid policy 

The other driver of markets in November came from China, where there has been some easing in Covid testing requirements and quarantine rules across major cities, following protests over ongoing restrictions. China’s zero-Covid policy to date has had a devastating impact on the world’s second-largest economy and has caused supply chain issues globally. US manufacturing orders in China are down 40% and factories in China are shutting two weeks earlier than usual ahead of Chinese New Year. Economists polled by Bloomberg have forecast a year-on-year drop of 7% for China’s imports as consumer sentiment has been affected by relentless Covid and travel restrictions as well as a severe property sector slowdown. Trade data released this month will give markets a better view of just how much domestic and foreign demand has been affected.  

COP 27 Climate Change Conference 

Rathbone Greenbank’s deputy head Nicola Day attended the COP27 Climate Summit in Sharm el-Sheikh. The summit saw small steps of progress on some issues, but many more contentious areas were left for future climate talks, after the two week summit ended a day and a half late.  

Progress made on cutting emissions was seen as disappointing. Whilst the COP27 text reiterated the COP26 decisions on “phasing-down unabated coal” it failed to progress this wording to “phasing-out.” In addition, the agreement failed to broaden its remit to encompass oil and gas, despite a proposal by India (supported by over 80 countries including the European Union and US) that would have helped take the emphasis off focusing mainly on coal. Other disappointing wording was around “low emissions and renewable energy” seen by some as a potential loophole to allow the development of further gas resources. There was a large presence of delegates from the fossil fuel industry and fossil fuel producing countries (636 as part of country delegations and trade teams) and this influence was reflected in the final agreement text. 

A make or break issue at the talks was the agreement of nearly 200 countries to establish a Loss and Damage fund to compensate Vulnerable Parties for damage done by climate events. Two main things were decided: “to establish a fund for responding to loss and damage” that is specifically for “assisting developing countries that are particularly vulnerable to the adverse effects of climate change.” How this fund will function is to be overseen by a Transitional Committee made up of 24 members, with 14 of these from developing countries. Whilst establishing a fund is positive progress, there is much work to be done to flesh out its rulebook – such as defining what is meant by ‘vulnerable,’ agreeing which countries will be paying into the fund, and under what conditions access to the fund can be triggered. The aim is for the fund to become operational at COP28 in 2023, but clearly this will involve extremely challenging negotiations. 

“Whilst establishing a fund is positive progress, there is much work to be done to flesh out its rulebook – such as defining what is meant by ‘vulnerable,’ agreeing which countries will be paying into the fund, and under what conditions access to the fund can be triggered.” 

Other positives from the two weeks included Brazil’s president-elect Luiz Inácio Lula da Silva promising zero deforestation by 2030. In a rousing speech, he told the summit that his administration would go further than ever before on the environment, cracking down on illegal gold mining, logging and agricultural expansion in order to restore climate-critical ecosystems. Human rights and the Just Transition were also widely discussed, as delegates were keen to shine a spotlight on the inclusion of a wide group of stakeholders in the transition to a low-carbon future. A work programme was set up to advance the issue further, although at the moment we do not know when this will formally begin.  

Another positive from the summit was the commitment from countries representing more than half of the global economy, specifying the steps they will take to help accelerate the low-carbon transition by cutting emissions in sectors such as power, transport and steel. Countries including the US, UK, Germany, Japan and Canada have backed a set of 25 “Priority Actions” that will be unveiled at next year’s talks in Dubai. The hope is that by agreeing on a set of steps, for example agreeing a date to phase out gasoline-driven vehicles, they can send a clear signal to the market of policy direction, encouraging investors and companies to act. Originally called the Breakthrough Agenda, launched at COP26, it is the largest ever collaborative effort to drive industry changes, which will now cover hydrogen and agriculture, and will include buildings and cement industries from 2023.    

Looking ahead, this December nearly 200 countries will meet in Montreal, Canada, at the United Nation’s COP15 Biodiversity Summit to work towards what we hope will be a landmark deal to safeguard nature. Rathbone Greenbank’s stewardship and engagement lead Sophie Lawrence will be attending to help highlight the importance of private finance in combatting biodiversity loss, in addition to the need for a clear global policy framework to accelerate action.  

Conclusion 

November was a strong month for investment markets, with investors buoyed by signs of slowing (albeit still rising) inflation in major economies, and signals from China of easing Covid restrictions. We however continue to be cautious and see challenges ahead, with slowing economic growth across major economies and sky-high inflation. Our investment portfolios are tilted in favour of defensive, quality stocks; businesses that are better placed to ride out turbulent times, particularly given the challenging outlook for global growth. We continue to focus on investing for the long term, finding opportunities in companies that deliver products and services supporting sustainability trends, which are underpinned by long term structural drivers.