November insight: Monetary tide has turned

We open with a strategy piece by Alastair George, who believes that the monetary tide has turned with bond yields in the US and Europe tumbling during November while inflation falls and policy rates peak. This has proved a welcome respite for global equity markets, which were under pressure from rising bond yields over the summer. A massive sector rotation will have frustrated many absolute return investors over the past two years. In 2022 only the energy sector delivered positive returns while semiconductors and technology delivered substantial declines of 30% or more. This year semiconductors and technology have been the standout performers as rising bond yields crimped performance in slower growing and dividend-paying sectors. Inflation may have driven short- and long-term rates higher but is now clearly on a declining trend. We note that US five-year, market-implied inflation expectations remain close to 2%, having peaked at 3.5% in August 2022. The runaway inflation scare appears to be in the rear-view mirror. It is however the rapid rise in real rates that has impacted defensive segments of the equity market this year. With US five-year real rates still close to a 20-year high, we believe this source of valuation pressure is likely to ebb over the next 12 months. We remain neutral on global equities as US valuations are close to the top of their recent price/book range. However, the risk of ever-tightening financial conditions has clearly diminished and we believe market performance may broaden during 2024, both from a sector and geographic viewpoint. The technology sector has been supported by investors’ determination to pick artificial intelligence winners, but at current valuations delivery will become increasingly important. At present we prefer sectors outside technology, where valuations are less challenging and dividend yields are likely to compress as the prospect of declines in interest rates in the second half of 2024 comes into view.

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