October saw negative returns across most major asset classes, as concerns over inflation, rising interest rates and a potential global recession weighed on investor sentiment. Although, in the few days after the month end, markets staged a recovery and erased half those losses after Fed Chair Jerome Powell intimated that the US Federal Reserve might be done raising rates.

Global equities fell 2.7% in local currency terms (hedged back to Australian dollars) with US equities down 2.1% but ahead of other major markets like Japan (-3.1%) and Europe (-2.6% to -3.8% depending on the country). By sector, yhe weakness in IT names like Nvidia (-6.3%) and Tesla (-19.7%) was largely driven by higher interest rates and valuation concerns although Tesla’s earnings and outlook also disappointed. Overseas healthcare and consumer staples stocks proved more defensive. For unhedged Australian investors global equity portfolios were only down 1% for the month as the Aussie Dollar depreciated against the US dollar.

Australian equities fell 3.8% in October with smaller companies falling by a bit more. Healthcare and IT were the worst performers, dragged down by a couple of stocks that dominate those sectors, CSL (-7.4%) and Xero (-5.1%). Defensive sectors utilities and consumer staples held up better. The materials sector outperformed, led by gains in major miners Rio Tinto and BHP. Gold miners were also stronger, with Evolution Mining up 8.5%. Evidence of persistent inflation and the fear that the RBA might have to keep raising rates added too gloom in the local market while very mixed and noisy economic data added to the impression that the local economy is following a similar trajectory to the unbalanced US economy, albeit with the roughly 6 month lag we have seen over the last few years.  

Rising Australian bond yields (the 10-year yield touched on 5% for the briefest of moments this week) led to a 2% fall in value for the local bond market compared to -0.8% for overseas bonds. A perceived increase in recession risk meant that high quality corporate bonds saw larger declines than government bonds (because of both higher interest rates and rising credit spreads). High yield bonds also saw similar declines due to greater recession risk although they have actually done better so far this year as the floating rate coupons they tend to pay are not affected as much by interest rates. That is until the borrowing company can’t afford to pay those higher coupons, which is the financing squeeze that the market is starting to take a closer look at.

Gold was the standout performer during the month, gaining 7.3% in USD terms on safe-haven buying. Other commodities and alternatives struggled, with oil down 11% and the broad S&P GSCI Commodity Index down 5.4%.

The market tide often changes at month or quarter ends after funds and traders have rebalanced and taken a breath. We have seen more buoyant conditions so far in November with global equities, recovering some of October's losses as investors welcomed the Fed signaling a potential slowdown in the pace of rate hikes.

Australian equities are also up 1.8% in the last week, led by IT, healthcare and consumer discretionary stocks and with  smaller companies leading the rebound here and abroad. Local real estate stocks, though responded with the greatest alacrity jumping 4.2% with global equivalents up almost as much. Listed infrastructure also gained, returning 2.8%.

Commodities were mixed, with energy falling slightly but metals and agriculture rising. Gold has been treading water.

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