Market Analysis Nov 2021

It's crucial to underline that past performance is not a reliable predictor of future outcomes. Any past performance mentioned is presented for illustrative purposes only and should not be taken as a guarantee of future performance. The sectors, securities, regions, and countries mentioned are provided for informational purposes and should not be interpreted as investment recommendations.

In November, US equities faced a slight downturn due to a convergence of factors: the emergence of the Omicron Covid-19 variant and a more hawkish stance from the Federal Reserve. Jerome Powell, the Chair of the Fed, acknowledged the robustness of the US economy and the potential threat of higher inflation, indicating that an accelerated tapering of asset purchases was under consideration. However, the Omicron variant's appearance prompted some to advocate for patience and raise questions about the sustainability of economic strength. Despite these uncertainties, recent data revealed a drop in US unemployment to 4.6% in October, ongoing growth in retail sales, and robust industrial activity.

Throughout the month, the S&P 500 experienced a minor decline. The financials, communication services, and energy sectors were among the weaker segments, while technology and consumer discretionary sectors showed more resilience, posting modest gains. US chipmakers performed well, with optimism about future earnings despite prevailing supply constraints. It's important to note that sector performance is subject to change, and past performance is not indicative of future performance.

Eurozone shares experienced a decline in November, primarily due to a surge in Covid-19 cases in some countries, leading to the imposition of activity restrictions. The revelation of the Omicron variant toward the end of the month intensified investor worries about the potential need for additional restrictions that could adversely affect business operations.

Weakness was notable in the energy and financial sectors, while sectors sensitive to economic reopening and recovery faced declines due to concerns about reduced demand triggered by the Omicron variant. However, communication services emerged as the best-performing sector, driven by merger and acquisition activities, including a significant takeover offer for Telecom Italia.

Annual inflation within the Eurozone reached 4.9% for November, surpassing the European Central Bank's 2% target and marking the highest level in the single currency era. Despite this, the ECB remained cautious about tightening monetary policy, with Christine Lagarde, the ECB President, anticipating a easing of current price pressures by the time tightening measures take effect.

In Germany, coalition talks concluded, resulting in Olaf Scholz of the Social Democrats assuming the chancellor position in a coalition government with the Greens and Free Democrats. The new government is expected to prioritize climate targets.

November saw a decline in UK equities, with economically sensitive sectors like energy and financials facing underperformance. Travel and leisure sectors also suffered due to renewed travel restrictions in response to the Omicron variant. Financials were affected by heightened uncertainty surrounding interest rate hikes and concerns about reduced business activity in China.

While the Bank of England refrained from increasing base lending costs at the start of the month, domestically focused sectors like housebuilders and retailers recovered losses. However, the reintroduction of Covid restrictions, including mask mandates, prompted sharp sell-offs and continued underperformance of UK SMID equities for the remainder of the month.

The emergence of the Omicron variant triggered a widespread sell-off in Asia ex Japan equities in November. Concerns about potential disruptions to the global economic recovery led to declines. Singapore, China, and Hong Kong witnessed significant market drops due to concerns about the variant's impact on vaccine efficacy and potential lockdowns. Other Asian markets, including Thailand, South Korea, Malaysia, Indonesia, and India, also faced negative returns. Taiwan and the Philippines were exceptions, achieving modest positive returns.

In Japan, the stock market declined by 3.6% in November. Despite positive prospects for Japan stemming from political stability and a significant fiscal stimulus package, the Omicron variant's news overshadowed these potential benefits. Economic data for the month highlighted higher commodity prices and supply-chain constraints affecting the economy. Inflation in Japan showed a gradual return to positive territory.

Risk sentiment experienced a notable impact in November, driven by the emergence of the Omicron Covid-19 variant. This development prompted a sell-off in stocks and high yield credit, while government yields declined, and the US dollar strengthened. Oil prices also suffered due to concerns over global demand.

Inflation indices in the US, Europe, and the UK remained elevated, causing fluctuations in yields throughout the month. Despite a more hawkish stance from the US Federal Reserve, the US 10-year Treasury yield decreased from 1.56% to 1.46% over the month. The yield curve flattened, and the 2-year yield rose from 0.50% to 0.57%.

In Europe, the German 10-year yield fell from -0.09% to -0.34%, and the Italian 10-year yield fell from 1.13% to 0.98%. European Central Bank President Christine Lagarde indicated that rate increases next year are unlikely.

Corporate bonds exhibited varying performance, with investment-grade credit posting flat total returns (local currency) but underperforming government bonds. High-yield credit declined, with spreads widening notably in the final week of the month. Emerging market debt experienced mixed performance across hard and local currencies, with EM currencies facing declines. The Turkish lira was particularly affected.

Convertible bonds faced headwinds from falling equity markets, resulting in a decline of -2.6% for the month. However, strong primary markets saw the launch of new convertibles, with valuations of European convertibles being impacted the most.