In this Market Update, we look back at the global financial markets in October, provide an outlook for the months ahead and explain how we adjusted our portfolios in the last rebalancing.
Political events
Global political events in October were dominated by the reignited conflict in the Middle East. Should this conflict continue to escalate, further macroeconomic impacts can be expected. For instance, global inflation, economic activity, and potentially higher oil prices, as the conflict may spread to other regions. The Middle East is responsible for around a quarter of the global oil supply. As an initial impact, oil and gold prices have already seen a short-term rise.
The conflict has introduced a new factor into the already challenging macroeconomic context, which has been characterized by rising interest rates, tight monetary policy, and a US that was only partially able to respond. The widely-watched Volatility Index (VIX) also experienced a sharp short-term increase.
Global equities fell by 3% in October, partly due to valuation adjustments resulting from higher interest rates.
The situation on the markets
On one hand, investors are currently risk-averse, as evidenced by many global investors holding above-average amounts of liquidity and the high demand for hedging instruments. On the other hand, a shift away from this risk-averse attitude, coupled with the available liquidity, could also drive-up prices. There is also a prevailing assumption that US interest rates have peaked, or will soon peak, which could at least alleviate the pressure of interest rates on equities. Despite the complexity of the current environment, positive countertrends can emerge at any time. Notably, a robust strategic allocation has proven to be extremely important in such challenging periods.
The impact on the asset classes equities and bonds
Current developments in the financial markets are influenced by an above-average number of strong factors. In addition to the conflict in the Middle East, interest rate policies and the trajectory of economic growth continue to dominate market activities. Regarding interest rate policy, a turning point is becoming apparent — that is, a foreseeable end to interest rate hikes. Both the European Central Bank and the US Federal Reserve refrained from further increases in October, though future hikes have not been ruled out.
Equities
Against this backdrop, equities also declined in October (by approximately 3% worldwide), experiencing some pressure in comparison to bonds, which are benefiting from higher yields. However, the Swiss equity markets performed relatively well in an international comparison.
Bonds
There is a strong negative correlation between bond yields and equity market performance. As a result, bonds have become more attractive again. For instance, the interest rate on ten-year US government bonds has exceeded 5% for the first time in 16 years. “Safe haven” assets, such as gold, have also seen benefits. This underscores once again the importance of a broad-based asset allocation for risk diversification.
What are the implications for the Everon portfolios?
We regularly review our portfolios to ensure a constant asset allocation, which is demonstrably the most important factor for long-term performance. The current period is undoubtedly marked by above-average uncertainty. One way to mitigate this volatility is to focus on stable companies with solid fundamentals and high dividend payouts. Typically, large-cap stocks perform better in such situations. This approach is embodied in our Income strategy, which concentrates on solid, high-dividend, and high-payout stocks and has managed to offset the generally disappointing market performance well. We also offer customized solutions, such as capital protection products, that significantly reduce uncertainties.
