November Comment: Equities at an all- time high

October saw many equity indices make new all-time highs as better than expected earnings and waning concerns on inflation helped lift sentiment. Two thirds of US companies have reported Q3 results, with 82% beating expectations. Health Care, Communication Services, Information Technology and Energy were the largest contributors to positive revisions. Earnings are up 37% year over year, which is 10% higher than pre-quarter analyst expectations.

Earnings expansion is likely to continue at an above average pace during the coming year as the global economy continues to recover. We view inflation and the gradual removal of fiscal and monetary support as confirmation of self-sustaining recovery. The Bank of England delayed its first post crisis rate increase and maintained the pace of quantitative easing. It was widely expected that the BOE would follow the Federal Reserve in announcing a move toward policy normalization. Note that the Federal Reserve earlier in week had announced a $15 billion a month reduction in its purchase of US debt.

On the fiscal front, Rishi Sunak announced an increase in government expenditure on healthcare, education, and infrastructure. There was no mention of austerity and the public sector pay freeze was removed allowing many households to cope with rising costs. Government borrowing is expected to drop meaningfully as GDP recovers to pre-pandemic levels. The real test of the governments levelling up agenda will come when it raises taxes.

UK government bonds have seen wild swings during the last few weeks. Higher than expected inflation, labour shortages and the lack of a monetary response caused gilts to sell-off during September. 10-year yields rose to 1.2%, their highest level since mid-2019. While the BOE failed to act this week, policy normalization is firmly on the agenda and gilts appear to have found a floor. Sterling volatility appears to be back, and this can impact how we think about allocations to non-sterling asset classes. While sterling volatility is controlled through an allocation to foreign assets, it can prove problematic in low-risk portfolios. We are monitoring portfolios regularly and will adjust holdings if volatility mandates it.