Global equities had another mixed week with some positives, as Sep/Oct continue to deliver their typical volatility driven by AI sector volatility, ongoing Govie/Bond turbulence and an uptick in M/E geopolitical tensions.
The current bull market marks its 4th anniversary this week, so it’s worth taking a closer a look at the current cycle.
The current bull market started 12 Oct 2022 when the S&P had fallen -25%, inflation was 8% (post Covid, Ukraine energy and supply chain crisis) and the Fed was hiking aggressively.
Since then the S&P has risen +117% (+130% with dividends), hitting over 120 new highs and pushing through a series of shocks (US regional bank crisis, Liberation Day, Iran/US conflict) that arguably could have derailed the bull cycle if we hadn’t had the global AI revolution (note: ChatGPT launched in 2022 at the start of this cycle).
At 4yrs the bull run is no longer early/mid stage, the average length is 5yrs on the S&P500 since 1950’s (per Factset).
This bull cycle was largely unloved, unlike previous cycles driven by highly speculative sentiment, with investors constantly concerned with inflation, timing and fear of rotation. Despite a constant wall of worry the economy has proved resilient with real GDP strong (2%+), a robust labour market and strong business investment (led by AI).
Bull markets do not die of old age it is usually an overly aggressive hiking cycle or a real recession. Neither we foresee in the next few quarters, but risks of corrections are rising, as earnings and valuations struggle to match growth expectations. So more defensive equity and portfolio positioning is prudent rather than allocating away from risk assets (the final portion of historical bull runs still deliver meaningful portfolio gains).
The key questions remain the same; can equity markets live with persistent higher rates (inflation / yields), will equity concentrations broaden without a major repricing, or will a geo-political crisis force the markets hand (i.e. Eurozone credit contagion).
US equities this week saw the SPX +1.15%, NDX +0.64% (after OpenAI earning forecasts disappointed) and the Russell2000 fell -0.91% (RTY is -6% over 6 weeks vs. SPX +1% offering a potential entry point). With sectors led by Energy, Staples and Utilities as Industrials and Tech lagged.
In Europe, the STOXX600 Index was flat on a hawkish ECB (unanimous rate hike vote) and mixed EU industrial data. The CAC40 led the decline –1.19% with Italy’s FTSE MIB -1.46%, DAX –0.57%. SMI was best performer +0.91%.
In the UK, theFTSE100’s defensive qualities drove positive performance as the region's best performer, rising +0.86%.
In Asia, markets were also mixed with Japan’s N225 gaining +1.06%, as large cap AI stocks drove gains and the broader TPX rose +0.34%. Chinese markets were shortened by Golden week and saw divergence as the onshore CSI300 fell -0.93% but, the offshore HSI gained +1.0% led by AI / tech names.
Other Assets:
Bond Markets saw some stabilisation following good demand across long-dated issuance. US Govie and JGB yields (10yr, 30yr) pulled back slightly but remain near 2-decade highs. Gilts were under pressure with the 30yr hitting 6.04% Wednesday (highest since ‘98) before falling back to 5.94% on Friday, adding pressure to Healey’s upcoming budget on the 28th Oct.
Precious Metals were broadly flat but followed a volatile intra-week path, falling sharply mid-week as yields spiked but recovering strongly on Friday.
Currency Markets saw a continued strengthening of the USD versus most global currencies (DXY +0.3%), its seventh consecutive weekly advance (+2.7%).
Energy markets saw Brent remain above $105/bl (+2%), before Trump/Putin announced a deal to suspend export sanctions till 7th April 27 and inject large quantities of Diesel – driving strong international backlash. The UK saw gas prices (NBP) surge above 200p/therm on Norwegian pipeline maintenance outages, compounding fears of a squeeze.
Macro:
US: the FOMC minutes showed a unanimous vote for the Sept 0.25% hike but uncertain timing of the next hike (markets pricing this as Nov). The University of Michigan sentiment survey fell again to 46.3 in Oct (Sep 48.1, Aug 51.7).
Europe: ECB minutes also showed a unanimous vote for the +0.25% hike and set a hawkish tone. German exports slide (-0.8% MoM) and French industrial output fell (-0.3% MoM).
UK: saw private sector growth slow (UK composite PMI 52 vs 52.5 in Aug), whilst the Lloyds house price growth index was flat (52.0) following last months –0.5pt fall.
Japan: improving household purchasing power is yet to translate into stronger consumption (avg wages +3.8% YoY, real wages +1.5% YoY but household spending –3.1% YoY).
China: Golden week tourism saw a growth in travel (826m domestic trips, +6.3% YoY) and revenue (+4.3%) but household spending remains uneven.
Fundamentals
This week sees major U.S. banks open Q3 earnings season, also look for ASML and TMSC mid-week. Analysts are forecasting earnings growth of 29.6% for the S&P 500, a high bar with risk skewed to the downside.
Monday: FedEx (FDX), Nurix Therapeutics (NRIX)
Tuesday: JP Morgan (JPM), Citigroup (C), Wells Fargo (WFC), Goldman Sachs (GS), United Health (UNH), JNJ, Domino’s Pizza (DPZ)
Wednesday: ASML, Bank of America (BAC), Morgan Stanley (MS), Blackrock (BLK), State Street (STT)
Thursday: Taiwan Semi-Conductor Mfg Co (TSMC), Charles Schwab (SCHW), Prologis (PLD), US Bancorp (USB), Marsh and McLennan (MESH), Alcoa (AA), Ericsson (ERIC)
Friday: The Travelers Corp (TRV), Truist Financial (TFC), M&T Bank (MTB)
This week sees major U.S. banks open Q3 earnings season, also look for ASML and TMSC mid-week. Analysts are forecasting earnings growth of 29.6% for the S&P 500, a high bar with risk skewed to the downside.
The Week Ahead
The Annual IMF meeting takes place this week in Bangkok, as financial leaders, central banks and delegates discuss geopolitics and macro concerns.
Monday: US Columbus day – cash bonds closed, equities open.
Tuesday: German CPI data, any uptick adds further pressure to ECB hikes.
Wednesday: US CPI will provide a major data point for the Fed ahead of the Oct policy meeting, expect a warm tick-up but a slowing trend (Sept was +3.4% YoY, unchanged vs Aug), Fed Beige book. China CPI and Trade Balance for Sept providing a view of factory gate pricing and consumer demand.
Thursday: UK Aug GDP forecast (look for flat). US PPI and Retail sales, following an aggressive jump +1.2% last month, look to see if consumer demand holds up.
Friday: US Industrial Production. Eurozone CPI data.
Active Defined Returns Fund Highlights ('DDR')1:
· The Fund returned -0.20% this week, against broadly mixed equity index performance demonstrating strong resilience from the buffered downside protection (NAV doesn’t include Friday’s market recovery).
· The Fund has delivered predictable, consistent returns over 6 months (+4.4%) and 12 months (+8.7%). Dragged lower by the recent pullback in markets but the fund is well positioned for performance into the end of the year and we continue to target 10%+ for the year and outperform our peers over 12 months2.
· The Fund is now £286m 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%. This has allowed us to add new positions with a higher 40% cover-to-capital loss (vs. 35% as standard) and still retain high coupons to deliver our targeted 10%+.
· The GILT portfolio remains fully interest-rate hedged to protect against the recent multi-week pressure on Gilt prices (rising yields).
· The EQD portfolio is well diversified with 49 positions and a wtdaverage coupon of 9.75%.
· Core risk metrics remain robust, providing strong resilience to a downturn with a Cover-to-capital-loss at 36.6%.
· The portfolio provides strong funding in excess of SONIA +43bps and maintaining a money-wtd maturity of 6.8 yrs.
Active Diversified Opportunities Fund Highlights ('DDO')1:
The fund returned -0.71% over the week, in a challenging period dominated by the bond market selloff and a fall in Korean equities, offset by the Gold thematic sleeve.
Korean Equities: The KOSPI fell -4.5% over the week, hitting the portfolio's Korean equity exposure across all books. Defence names led losses; Hanwha (-13.0%), Hanwha Aerospace (-12.9%), LG Defense (-12.4%) with Amorepacific (+2.2%) the small positive.
Korea remains well positioned among the lowest valuations of major equity markets combined with some of the highest expected earnings growth. We expect to see longer term repricing from current valuation floors, driven by earnings growth, increasing dividend yields and cash generation back to Holding Co’s.
Thematic Gold: Gold names were the standout contributor with Agnico Eagle (+3.2%), Barrick (+2.6%), Northern Star (+2.0%), and Franco-Nevada (+1.7%) all advanced.
Systematic Equity: Delivered mixed performance with Mastercard (+4.5%), Procter & Gamble (+3.6%), and FTAI Aviation (+3.2%) the strongest names, whilst BioMarin (-4.8%) and Drax (-2.9%) lagged.
Infrastructure & Renewables: Continue to contribute significant defensive ballas with Octopus Renewables (+1.8%), Greencoat UK Wind (+1.6%), Tufton (+1.8%) all leading, while Cordiant Digital (-2.9%) and HICL (-0.6%) lagged.
Hedges: BH Macro (+1.6%) performed its defensive role well amid the ongoing rates volatility, alongside strong explicit equity put protection. Which kicks in if markets correct further - put strikes are set at 90% on a look back basis.
Bond yields are challenging for wider equity markets but the fund is now well poised with adjustments now priced into the portfolio, valuation floors providing strong support, and good positive convexity built into the Fund.
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).
