CIO do not think the risk-reward currently favors a sustainable rally in equities. (ddp)

Perceptions of global financial risks also abated after the UK government abandoned plans for an unfunded fiscal expansion.

Gains were broad based in developed markets with the S&P 500 returning 8.1%. MSCI EMU returned 7.9% while the Swiss market returned 4.8%. The UK’s FTSE 100 lagged in October—returning 2.8%—but is still the only major market to have offered a positive return year-to-date. The rise in global yields also slowed overall in October, despite a surge in the middle of the month. This broadly positive outcome occurred despite several notable headwinds, which we expect to limit the potential for a sustained rally at present.

First, inflation data in much of the world has not supported the notion of an impending shift away from a hawkish posture by central banks. The Fed’s favorite measure of inflation—the core Personal Consumption Expenditure deflator—accelerated to 5.1% year-over-year in September compared with 4.9% in August. Eurozone inflation for October, released on the last day of the month, hit 10.7%—the twelfth consecutive record high.

Second, the US third-quarter earnings season is pointing to a loss of momentum. This was especially the case in the tech sector, which is suffering from weaker capital and advertising spending by companies along with ebbing consumer demand. Overall, with close to three quarters of the S&P 500 by market cap having reported earnings, it looks likely that growth will be in the 1–3% range. Only 64% of companies are beating estimates compared to the 75% average over the last five years.

China remains a concern for global investors. The 20th Party Congress failed to provide any hints of a relaxation of the nation’s zero-COVID policy. Investors were also concerned by President Xi Jinping’s consolidation of power. The MSCI China was the worst performing major market in October, losing 16.4% on the month and 41% year-to-date.

While sentiment has been improving, with investors putting money back into stocks at the end of October after nine consecutive weekly outflows, we do not think the risk-reward currently favors a sustainable rally in equities. Against this backdrop, we continue to recommend a defensive investment posture.

Within equities we like capital protected strategies, value, and quality income. We like global healthcare, consumer staples, and energy, with a least preferred stance on growth, technology, and industrials. By region, we like UK and Australian equities relative to US equities. We also recommend investors diversify into less correlated hedge fund strategies to navigate market uncertainty.

Main contributors - Mark Haefele, Vincent Heaney, Christopher Swann, Alessia Stilli

Content is a product of the Chief Investment Office (CIO).

Original report - Putting October's rebound into perspective, 01th November 2022.