Markets (prior week): SPX -1.95%, RTY -3.05%, NDX -5.5%, UKX +3.13%, SX5E +0.50%, SMI +4.38%, NKY +5.37%, TPX -0.95%, HSI -0.10%, Brent +5% to $109.95, Gold -0.68% to $4,166/oz, Silver -6.3% to $56.98/oz, Bitcoin -2.3% $81.7k, VIX +35% to 20pts (peaking Friday, highest since June).
Equities:
Global equities last week continued the typical October downswing and elevated volatility (VIX hitting 20+, highest since June). AI names led an outsized sell-off, with Semis/Memory under pressure. Investors are increasingly focused on the huge financing required for CAPEX and sustainability of growth / valuations. Hitting harder names with lower cash cushions (CoreWeave, Oracle). This combined with the hot US CPI print and the start of Q3 Earnings drove a rotation from growth into more defensive sectors. Tech, Industrials lagged whilst Energy, Healthcare, Utilities and Consumer Staples rallied on the rotation.
Despite the Oct Halloween turbulence markets remain supportive at a fundamental level: Strong corporate earnings, more resilient GDP growth than expected (especially in EU, UK) and labour + consumer spending weathering well. The current rotation is positive, lowering AI concentrations and small corrections are healthy, allowing the market to rebalance.
US equities saw AI / Tech suffer the largest dip (NDX -5.5%), followed by the more rate sensitive Russell 200 (-3%) whilst the broader S&P500 only pared 1.5%. Q3 earnings saw regional banks (M&T, Citizens Financial) generally outperform EPS estimates, whilst the US majors posted good results led by Equities with fixed Income more mixed (GS, Citi, Wells, and a rare miss for JPM)
Europe is less exposed to Big Tech and saw more mixed results – but also missed the late Friday downdraft which followed through into Monday morning. STOXX600 Index gained +2% (ASML solid earnings, Luxury disappointed), with the DAC +2%, CAC40 +2% and SMI was the best performer +4.4% led higher by Healthcare and Insurers.
In the UK, theFTSE100’s defensive qualities saw it advance +3.1% led by Healthcare (GSK, Astra both +5%) and recent rerating in Greggs (+20% last 2 mths).
In Asia, saw Japan falling as AI/Semis sold off driving the more exposed NKY -5.4% before a partial Friday rebound, the broader Topix was only -0.95% with some easing in producer and good pricing (both below estimates). China followed a similar story with the CSI300 -3.4% and the offshore HSI only -0.1%, led lower by Tech with Financials performing better. South Korea fell over 14% last week and is 38% off its peak but remains +45% YTD.
Other Assets:
Bond Markets saw yield curves flatten and longer dated yields fell for 2nd week in a row. UST 10yrs fell 16bps to 5.08%, 30 yr fell 17bs to 5.43%, the short end was more muted. Gilts followed a similar small rally on good demand, whilst French OATS stabilised after the recent extreme spike in yield /sell-off, a budget concerns and violent demonstrations continue.
Precious Metals fell broadly across Gold (-0.68% / $4,166/oz), Silver (-6.3% / $56.98/oz), as well the broader PPG group metals. Pushed lower by higher yields, rebounding Friday on safe haven flows as the Tech sell-off rattled risk markets.
Currency Markets saw USD weaken slightly (DXY -0.37%) after recently touching a 52-week high.
Energy markets saw recent declines reverse with Brent up +5% WoW to nearly %110/brl driven by M/E shipping attacks, US weather risk and low EU gas storage levels. EU/UK electricity and gas prices are moving progressively higher as we approach winter.
Macro:
US: the CPI print came in hot (+3.7% YoY, above consensus and +0.3% (MoM), whilst US PPI also highlighted accelerating price growth, spooking risk assets but probability of a Fed hike is only 17% in Oct with all eyes on Nov.
Europe: Eurozone inflation remains elevated (Spain CPI +4.9%, French CPI +3.1%) whilst EU Industrial production fell -0.5% MoM, its third mthly decline.
UK: saw the economy expand modestly in August (+0.1, above estimates) as the UK continues to show good resilience. Manufacturing production jumped 1.2% MoM, and industrial production +0.8%, whilst the trade deficit narrowed.
Japan: JGBs fell to a 5-week low (10yr -7bps to 2.94%) on some safe haven safe haven flows, inflation remains elevated with further tightening expected but not at the oct meeting, eyes are on Dec. JPY/USD was broadly flat.
China: saw PPI spike to +5% YoY in Sept (+1.2% MoM), CPI ticked up to 0.9% (+0.1%moM). Exports accelerated again on Tech demand to +36% YoY in Sep (+11% MoM). The EU now taking direct action to limit Chinese hybrid car imports to 350k p.a.
Fundamentals
A very busy mix look for SpaceX, Netflix (Tues) and then Meta, Tesla (Wed). As well US defence names through the week. Others to note: P&G, Barclays.
Monday: Fifth Third Bancorp (FITB), Steel Dynamics (STLD)
Wednesday: Meta, Tesla (TSLA), Lam Research (LRCX), Philp Morris (PM), SAP, Thermofischer (TMO),Texas Instruments (TXN), IBM, Abott Labs (A T), NextEra, AT&T (T)
Thursday: Proctor and Gamble (PG), Union Pacific (UNP), Southern Copper (SCCO), Valero Energy (VLO), Lockhead Martin (LMT), Newmont (NEM), Spotify (SPOT), Blackstone (BX). Barclays PLC
Friday: Amex (AXP), ENI Spa, Rogers Comms (RCI), Infosys (INFY), Dr Reddys (RDY)
The Week Ahead
· Monday: US Homebuilders data, Wells Fargo US Housing Market Index
· Tuesday: US Home sales and new starts
· Wednesday:
· Thursday: US weekly unemployment claims
· Friday: UniMich Consumer Sentiment Index
Active Defined Returns Fund Highlights ('DDR')¹:
· The Fund returned +0.48% this week, against mixed equity market performance continuing to demonstrate strong resilience from the buffered downside protection.
· The Fund has delivered predictable, consistent returns over 6 months (+4.5%) and 12 months (+9.4%), and we continue to outperform our peers over 12 months2.
· Despite the recent seasonal pullback in markets, the Fund is well positioned for performance into the end of the year with over £60m recently invested (Primary and secondary) as index levels moved lower in Sept/Oct, and 85% on the EQD swaps are ‘At’ or ‘In-The-Money’.
· The Fund is now £287.5m AUM with a strong pipeline to £300m in the next 4-6 weeks.
· EQD defined return pricing remains strong, boosted by higher GILT yields, delivering coupons of approx. GILTs + 5%.
· We added 2 new EQD positions on market weakness and higher volatility levels, securing over 9% coupons and trading one with a 50% downside buffer – as we continue to actively consolidate current strong pricing to reduce risk. The EQD portfolio is well diversified with 51 positions and a wtdaverage coupon of 9.72%.
· We added to our 4f34 (2034) GILT position adding £6m and receiving strong yields (swapped to SONIA + floating rate) following recent GILT weakness. The GILT portfolio remains fully interest-rate hedged to protect against the recent multi-week pressure on Gilt prices (rising yields).
· Core risk metrics remain robust, providing strong resilience to a downturn with a Cover-to-capital-loss at 37.7%.
· The portfolio provides strong funding in excess of SONIA +43bps and maintaining a money-wtd maturity of 6.76 yrs.
Active Diversified Opportunities Fund Highlights ('DDO')¹:
The fund fell modestly -0.22% in week that saw continued pressure on risk assets and stabilisation (but no strong recovery) in bond markets as inflations fears continue to perpetuate higher-for-longer expectations.
The Korean equity book and tech-exposed names led lower, partially offset by a strong week for European defence and the hedge defensive sleeve.
Thematic Equity Value Up: Saw the largest drag (-0.14% WoW), driven almost entirely by Korean stocks as a broad chip rout was triggered by reports of rapid advances in Chinese memory technology.
SK Square, Shinhan Financial, Samsung C&T, and HD Hyundai were all lower on the week.
Thematic Equity Defence: Was the best performing sleeve (+0.11% WoW), led by Rheinmetall's 14% surge on renewed European defence spending momentum, with BAE Systems and Babcock also rallying strongly.
Systematic Equity: Was broadly flat, with Fujikura and LGInnotek (both Apple supply chain names) falling amid the wider tech selloff that saw the Nasdaq post its worst week since June.
Hedge/Defensive: BH Macro continued to perform well in its defensive role in the risk-off environment over October, and Real Estate stocks added modestly as UK property names benefitted from the sector rotation.
The portfolio continues to carry high protection levels against a continued equity correction, with close to 100% of the equity sleeve notional covered. These positions are starting to now move higher in value as we approach the 90% put strikes.
This looks an excellent entry point into the fund with many of its sectors having already corrected and close to valuation floors.
1: Due to the forward pricing of UCITS Funds, the NAV does not relate to the exact same period as quoted for indices
2: Source Bloomberg on a 12 mth rolling basis, versus the WisdomTree Defined Returns Fund (B-class), and the Fortem Capital Progressive Growth Fund (A-class)
This material is provided for information purposes only and is intended for regulated financial advisers and professional investors only. It is not intended for retail clients and should not be distributed to or relied upon by retail investors.
It does not constitute investment advice, a personal recommendation, or an invitation or inducement to buy or sell any investment. Any decision to invest in or recommend the fund should be made solely on the basis of the current Prospectus and Key Investor Information Document (KIID), together with independent professional assessment of suitability.
Past performance is not a reliable indicator of future performance. Capital is at risk and investors may get back less than they originally invested.
Issued by Capel Asset Management, 20 North Audley Street, London, W1k 6WE. Capel Asset Management Limited is authorised and regulated by the Financial Conduct Authority (Firm Reference No. 1057826). Registered in England and Wales (No. 17191384).
