Investment Viewpoint: A tough week but opportunities ahead

Simplify the complex with clear and concise market insights direct from our investment experts every week.

Markets and macro insights with Bernard Swords, Chief Investment Officer

How did equity markets perform last week?

• Equity markets had a challenging week, falling 1.5% in euro terms. Questions persist about high valuations in the AI sector, and whether its rapid growth will continue. The IT sector was hit hardest, down 4%. Related sectors like industrials and consumer discretionary also fell between 2% and 3%.
• The other factor weighing on markets was the timing of US interest rate cuts. After the latest jobs report and comments from the Federal Reserve, it would seem that rate cuts may be delayed.

What were the strongest market performers? 

• Healthcare stocks continued to shine, rising nearly 2% despite the tough market backdrop. And while AI-related shares fell, fundamentals are improving. NVIDIA’s latest results were strong, with sales beating expectations and guidance unchanged.
• This suggests that earnings forecasts for NVIDIA and the broader sector could rise. When fundamentals improve but prices drop, it often signals opportunity – something we’ll be watching closely.

What are the important indicators for the US economy?

• The first US jobs report since the government reopened contained mixed signals. Job growth was stronger than expected at 144,000, though previous months’ growth rates were revised to register lower growth. The unemployment rate ticked up as more people entered the workforce, which was unexpected given immigration trends.
• Overall, the report represents an improvement over recent months and could point to a turnaround in the labour market – a key area of concern.

How did other regions perform?

• In Asia, Japan announced a large stimulus package, but markets reacted nervously: the yen fell, bond yields rose, and equities dropped. There are also rising tensions between China and Japan after comments on Taiwan’s security.
• China responded by banning some imports from Japan and advising its citizens not to travel there – a blow to Japan’s tourism sector. We have little exposure to Japan or the Pacific Basin, but we’re monitoring developments.

What other positive indicators emerged last week?

• Despite market turbulence, fundamentals improved in some areas this week. Prices have fallen sharply, which could create opportunities for long-term investors. We’ll keep a close eye on these trends in the weeks ahead.

Fixed Income Markets with Elizabeth Geoghegan, Head of Fixed Income

What has been the dominant story in fixed income markets in recent weeks? 

• A strong influencing factor for fixed income markets of late has been the repricing of expectations surrounding US interest rate cuts by the Federal Reserve. Markets have assigned a US Fed rate cut in December a 35% likelihood, down from 75% at the end of the third quarter of this year.
• There have been a few factors driving this, one main driver has been the availability of labour market data. Non-farm payrolls numbers were not released during the US government shutdown. Last week it was announced that there will be no October payrolls report, and that this month’s (November’s) report will not be released until December 16, nine days after the Federal Open Market Committee meets. This limits the information available to the Fed, who have long pointed to labour market weakness when seeking to cut rates. In addition to this, the minutes from the October meeting of the FOMC showed that many officials were against a December cut.
• Government bonds outperformed in October and for the month to date due to the uncertainty deriving from tariff negotiations, negative credit market headlines, concerns about tech valuations, and the US government shutdown. However, even if some of this uncertainty lifts, the move to lower expectations for Fed cuts will be a hurdle for Treasury outperformance over the medium term.

What is the situation with European bonds?

• In contrast to the situation in the US, European fixed income markets are all down month to date. Where yields in the US below 15 years have fallen, there has been a slight increase for all European bond yields, to the tune of 5-10 basis points. This can be distilled down to several factors. As I noted previously, the rise in uncertainty in October bodes well for government bonds, a theoretically ‘safe haven’ asset. So, it is no surprise that as some of this uncertainty lifts, we see a slight unwind of the outperformance for government bonds.
• The reason this has been the case to a greater extent in Europe than in the US is due to the different central bank positions. Cuts from the European Central Bank are on hold, whereas the Fed is still cutting. As a result, when sticky inflation data emerges in Europe, as it did last week, yields remain elevated, driving negative price performance.

What is the situation in credit markets?

• Turning to credit markets, we spoke last week about private credit and how this is not yet pointing to systemic credit market deterioration. I’ve been to several manager events recently from PIMCO to Morgan Stanley and the message is much the same: they view the headlines as idiosyncratic rather than systemic.
• Counterintuitively, this can be seen as a positive for markets: volatility creates opportunity. Unlike equities, historical data shows that active fixed income managers tend to deliver higher median returns than passive strategies, highlighting ample potential for outperformance in fixed income markets.
• There are several reasons for this, but one factor that is important in credit markets is avoiding defaults. The active managers to whom we have allocated investments to all noted an ‘up-in-quality bias’, the objective being, to remain invested but to limit downside in periods of volatility.