Equities Down But Safe-Haven Inflows "Half-Hearted" So Far – Kingswood

Amanda Cheesley Deputy Editor 25 October 2023

Equities Down But Safe-Haven Inflows

Rupert Thompson, chief economist at UK-based wealth manager Kingswood, discusses upcoming market trends in global markets, including equities and fixed income, and the outlook for the US, UK and Chinese economies.

Equities fell last week but so far there hasn't been a stampede into safe-haven assets, a wealth management figure says as investors continue to digest heightened geopolitical and economic concerns. 

Rupert Thompson, chief economist at Kingswood, said in a note that global stocks more than reversed their gain the previous week, ending down by around 2.5 per cent in both local currency and sterling terms.

“Markets are now down some 7 per cent and 3 per cent respectively from their end-July high,” Thompson said.

He spoke in the aftermath of the 7 October attacks on Israelis by Hamas, Israel's reprisals, and growing international concerns that the violence could spread. It adds to existing worries about the Russia-Ukraine war and whether rising global interest rates to curb inflation will tip the world into a recession. 

“While worries of an escalation of the war in the Middle East clearly remain, the impact on oil prices has so far been quite limited,” Thompson said. The Brent oil price is $92 a barrel for the first time in 10 months, up on its mid-summer low of $72, but still below its September high of $97. “A surge in oil prices would be the main way in which a broadening in the conflict to Iran could inflict damage on the global economy."

“Investor flows into traditional safe havens have also been decidedly half-hearted. Gold has continued to benefit, rising a further 4 per cent last week and is back up close to $2,000 per ounce,” Thompson said. “But the US dollar, which one would have expected to strengthen, is down a bit. As for government bonds, they have seen yields continue to march higher rather than decline on the back of safe haven flows."

“Indeed, the main source of downward pressure on equities has come from bonds. Ten-year US Treasury yields rose a sizeable 0.3 per cent last week and are now testing the 5 per cent mark for the first time since 2007,” he said. “The rise has caught almost everyone by surprise and in good part reflects the continued unexpected strength of the US economy.” Other asset managers on both sides of the Atlantic are also positive about bonds. See more here.

“Last week provided further evidence on this front, with retail sales surprising on the upside in September and initial jobless claims falling to a nine-month low,” he added. “Third quarter GDP data released this coming Thursday should show growth running at an annualised pace of 4 per cent or more. This is over double the economy’s trend growth rate and a big surprise given the Fed has hiked rates by as much as 5 per cent over the previous 18 months.” 

Peaked yet?
Thompson asks whether interest rates have peaked. 

“Upward pressure on yields has also come from increased concern over the large amount of government debt needing to be absorbed by the market,” Thompson continued. Despite the lack of clarity near term and the possibility of some overshoot, he believes that bond yields should finally be at or close to their peak, having scope to fall back over the coming year.

“The rise in yields has been led by the US but 10-year UK gilt yields have also risen significantly to 4.7 per cent and are back to their highs seen earlier in the year,” Thompson said. "The latest batch of data on UK inflation pressures provided no big surprises. Inflation came in slightly higher than expected in September, following the big undershoot seen in August. The headline rate was unchanged at 6.7 per cent, while the core rate edged down to 6.1 per cent from 6.2 per cent.” 

Meanwhile, wage increases have yet to slow significantly. Underlying average earnings' growth excluding bonuses was unchanged in August at 7.8 per cent.

Although wage gains are now outpacing price increases, consumers still remain under pressure. Retail sales dropped a larger-than-expected 0.9 per cent in September and consumer confidence fell in October, reversing some of this year’s recovery,” Thompson said of the data. “As in the US and the eurozone, the expectation remains that the Bank of England will most likely keep rates unchanged at their next meeting."

On the other side of the world, last week’s crop of numbers in China suggest that the recent pessimism over the strength of the post-Covid rebound was overdone. “The economy grew at a faster-than-expected 5.2 per cent annualised clip in the third quarter, up from 3.2 per cent in the second. Retail sales and industrial production also beat expectations in September,” he said.

Lastly, US earnings are broadly in line with expectations at around a gain of 1 per cent on a year earlier. “The tech titans, however, will be a major focus to see if their earnings' numbers justify their relative resilience so far in the face of higher bond yields. Alphabet, Amazon and Microsoft all report over the next few days while Apple reports next week,” Thompson concluded.

Register for WealthBriefing today

Gain access to regular and exclusive research on the global wealth management sector along with the opportunity to attend industry events such as exclusive invites to Breakfast Briefings and Summits in the major wealth management centres and industry leading awards programmes