Key points
- Volatile month
- Investors risk-averse
- Prospect of solution in Europe?
UK
November was yet another volatile month, as confidence waned about the likelihood of a lasting resolution out of the Eurozone, only to be swayed into more positive territory by month-end as six major central banks pumped liquidity into the European banking system. The UK ten-year Gilt yield fell to 2.31% versus 2.44% at the start of the month. Spreads of subordinated financial bonds were highly volatile during this time, but the prospect of some form of fiscal harmonisation in Europe saw credit spreads narrow somewhat. Towards the end of November, credit markets rallied. (FTSE 100 -0.2%; FTSE 250 -1.4% and the FTSE Small Cap -3.4%).
Global
Despite the volatility, markets ended November flat. The lack of a concrete resolution in Europe led markets heavily downwards for the first part of the month, but better news from the US economy and a pro-active China led to a bounce-back in the final week. On the final day of the month, an unprecedented move by six central banks caused global markets to rally between 4%-5%.
Over the month, the US was -2.4%; Europe -2.9%; Japan -1.7%, and emerging markets -4.4% (total return terms).
Investment Outlook
We remain cautiously optimistic into the New Year. The market has demonstrated a tendency to jump on the slightest bit of good news and has also rallied into the recent European Summit. But there are huge structural problems that still need to be addressed.
Europe’s story is sounding better than a few months before, but beware the spin. That’s not to say there are no reasons to be cheerful: the US is producing positive data, suggesting a (tepid) recovery; figures out of China are holding up well, and it looks like it will now avoid a hard landing. Going into 2012, those companies with earnings in the developing world should do very well, and there may be more opportunities to take advantage of any cyclicality. In the UK, we are likely to see further monetary easing and quantitative easing, but bank lending is likely to remain tight not just this year, but for some years to come. Next year could provide a transition period for the UK, where dynamics and existing relationships are tested, and new ones forged. The UK stock market may well rebound before the economy; we continue to tread with care.