Market Review – October 2023

Crisis in the Middle East

Following the difficult history between Israel and Palestine going back to the 1940s, matters have escalated this month due to the attacks on Israel and their subsequent retaliation.

Given the complexity of the issues, the danger is that the conflict escalates further and that other countries, potentially including the US, Iran, Saudi Arabia, and Lebanon, get involved to protect their own interests.

Following a pandemic, energy crisis, and spiralling inflation, a war in the region could be devastating for the world’s economy. Commodity markets are still unstable following the invasion of Ukraine and further shocks could drive food and energy prices even higher. Considering the Middle East’s role in the oil industry, the World Bank has estimated that the price per barrel could increase from $90 to $150 if the conflict escalates.

What’s Next for the Energy Market?

Just as energy prices were starting to stabilise, uncertainty around oil prices means that we could see yet another spike in costs.

Mergers in the oil industry this month have raised speculation around the future of fossil fuels. Hess and Pioneer have been acquired by Chevron and ExxonMobil respectively, suggesting that there is some life in the industry yet.

The view taken by the oil sector is that these ‘mega-deals’ simply would not take place if the demand for fossil fuels was in any doubt.

The alternative view is that it is precisely because of this uncertainty that larger players are consolidating their position, as scale offers the best chance of innovation and survival.

Climate change may not be at the forefront of global interests, but that doesn’t mean it has gone away. It’s likely that energy companies will need to adapt if they want to survive, and consolidation could form part of this strategy.

Beyond Equities – Other Asset Classes in a Challenging Market

Whenever there is a global crisis, we often see a ‘flight to safety,’ with investors selling down equities in favour of bonds, cash, property, and even gold. This occurred during the pandemic and the invasion of Ukraine, and it is happening again now following the events in Israel and Gaza.

Following significant volatility in the bond market in 2022, prices have stabilised, and yields are continuing to rise. Now that it is generally accepted that interest rates will be higher for longer, investors are starting to see bonds as an appealing option once again.

With rising interest rates, investors are also seeing better returns on their cash and money market funds. Money market inflows have accelerated rapidly in the last year, with around $1 trillion invested across the market. However, investors should remember that money market funds are not the same as cash and the underlying securities (which may include short-term bonds) could face risks around insolvency and liquidity.

Property funds have fallen out of favour since the financial crisis, with many large funds dropping in value, suspending redemptions, and even winding up entirely. Rising interest rates and inflationary pressures are unlikely to help matters, particularly as most property funds invest in commercial premises. Bricks and mortar property, on the other hand, remains a popular investment, and the UK property market has remained relatively stable throughout the recent turbulence. Of course, this may change, particularly if we do enter the seemingly inevitable recession.

Ultimately, equities are more volatile than the other asset classes, but they are also fairly predictable. Equities have the potential to offer the best chance of beating inflation over the long term. Generally, when the equity market becomes volatile following a crisis, this is short-lived, and a bounce-back quickly follows.

The UK Market

The FTSE 100 and the All-Companies sector have taken a downturn since the middle of the month, reversing the gains achieved since mid-August. Larger companies are faring slightly better than medium and smaller companies. Given smaller companies’ vulnerability to higher costs and interest rates, this is not surprising.

The rate of inflation in the UK is still over 6%, so while this is a significant improvement on where we were last year, it is still one of the main threats facing the UK economy.

Some of the companies showing reasonable growth this month include military supplier Avon Protection, The Restaurant Group (the parent company behind Wagamama and Frankie & Benny’s), and technology company Kin and Carta.

Energy companies such as Capricorn Energy and Petrofac have both seen significant drops this month following disappointing earnings announcements.

The Global Outlook

The major economies of the world have followed a similar pattern, with losses of 2% – 4% throughout North American, European, and Asian markets in October.

The S&P 500 has dropped from its high point earlier this year, although many analysts are referring to this as a ‘correction.’ Markets were buoyant for most of the year due to optimism over interest rate stability and growth in the tech sector (boosted by developments in artificial intelligence). However, the acceptance of the ‘higher for longer’ narrative around interest rates seems to be curbing further growth, while instability in the Middle East is adding to investors’ sense of caution.

Europe is faring considerably better than the UK when it comes to keeping inflation under control – rates are now at a reasonable level of 2.9%. This suggests that there may not be a need to raise interest rates further. The economy has started to shrink due to falling energy prices, however this may change depending on the escalating conflict in the Middle East.

We have seen further decline in the Asia Pacific market as economic growth in China continues to contract. 

Please don’t hesitate to contact a member of the team for more information on any of the topics covered.