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Described in the press as a blockbuster budget that would be the most consequential for twenty years, the message from Rachel Reeves was loud and clear; she is prepared to hike taxes and borrow more to finance more public spending and increase long-term investment. It felt like a traditional tax and spend Labour budget, raising £40 billion in tax and promising a big rise  in spending on public services. Yes, growth was repeatedly mentioned, but there was nothing transformational to suggest that sluggish medium term growth forecasts need to be revised upwards!

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Concerns over the budget had been dragging on investor sentiment in recent weeks and UK shares have been drifting down on the uncertainty. However, this was not like the Truss / Kwateng debacle mini budget of two years ago. Given the seismic change in strategy that the Chancellor has promised, the reaction from investors was initially relatively muted although gilts finished the month under pressure. There was some positive news for the UK economy which did start growing again in August with a 0.2% uptick and inflation falling more than expected to 1.7% in the September reading.

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Globally, news flow remains dominated by the US election. Whilst too close to call, President Trump is odds on to win with many bookmakers, so unlike his last victory would not be a shock to markets. Whilst a Kamala Harris victory would see little policy changes from the Biden administration. If the famous quote that ”it is the economy stupid” that decides the outcome then the 2.8% GDP growth in Q3 should boost the incumbent Democrat regime - but US politics doesn’t seem that rational!

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Elsewhere the IMF published its latest half yearly World Economic Outlook, with mixed projections for prospects of the global economy. There were upgrades for US and UK 2024 growth forecasts, but China, Japan and Eurozone forecasts were lowered. For what they’re worth the IMF predictions are that the global economy will grow by 3.2% in both 2024 and 2025, warning that geopolitical conflict, protectionism and hangover from high interest rates will continue to weigh on economic activity. China is still a vital cog in the global economy, but economic growth has slowed. Third quarter GDP growth was only 4.6%, above forecast, but below the previous quarter.

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For once, Central bankers were not making the headlines in October. The ECB trimmed another 0.25%, but all eyes are now on what move the US Federal Reserve makes post the election. Also, will the Bank of England be pro-active in cutting rates further. Markets are now pricing in 1.25% to 1.5% of UK interest rate cuts by the end of 2025, which would be more instrumental than the budget measures in boosting confidence and economic activity.

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Market Watch

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Looking at stockmarkets first and it was a subdued backdrop last month with the MSCI World index falling back by 0.9%, with the political uncertainty weighing on short-term sentiment. Ironically the only bright spot of major global markets was Japan where the Topix gained 2.19% despite a turbulent general election result (the ruling LDP under new PM Ishiba recorded the second worst result in their history).

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The US market was largely influenced by the latest earnings of the tech giants with mixed results. Tesla pleased the market and strong profit growth was reported by Microsoft and Meta, but investors demand perfection given sky high valuations are pricing in a strong outlook for many years into the future. Both stocks led a technology sell off on Halloween wiping out gains made earlier in October and resulting in a monthly fall of 0.9% for the S&P 500 and 0.5% for the Nasdaq. Yet tech companies are still receiving premium valuations, OpenAI completed a fund raising round last month valuing the business at $157 billion – not a bad return for Microsoft who pumped in $10 billion a few years ago for supposedly up to half the business.

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At home the FTSE fell 1.4% placing it mid table in global markets, with buyers staying away ahead of the budget - there were some positives with strong results in the banking sector.  After the supercharged Chinese stockmarket rally in September, Beijing failed to increase the stimulus that the market wants to see to maintain confidence in an economic recovery and MSCI China fell back 5.6%.

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Bond markets have had a volatile month, and prices have fallen, and yields risen in the US and UK despite recent rate cuts and slowing inflation. In the UK the big increase in public spending planned over the next five years is clearly spooking markets with the yield on the ten-year gilt rising from 4% at the start of October to 4.44% in October. In the US, yields have also risen with the ten-year US treasury gaining 0.5% to finish the month yielding 4.28%, as the economy remains strong meaning rate cuts may not meet market expectations, and investor worry that a Republican election win could result in more inflationary policies.

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The strength of the US economy saw the dollar have a strong month gaining 4% versus the pound, almost 6% against the Yen and 2.5% versus the Euro. The pound gained 2% against the Yen but lost ground versus the Euro as well as US dollar. Bitcoin was up 14.39% in euros and is up 73% in 2024.

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In commodity markets Gold started October at $2654 and continued the recent surge. It hit various new highs last month both in US dollar and sterling terms. An ounce breached the $2800 level before closing the month at $2749. Oil, thankfully for those worried about inflation, has fallen back of the last few days due to Israel’s muted retaliation against Iran, but the price of a barrel of Brent rose slightly in October from $71.77 to finish at $73.16.

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Fund Watch

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Moving on to funds and it was gold and precious metals that delivered. Four of the top ten funds were in gold and precious metals with more in the top twenty. Gold has been a clear winner in 2024 with falling interest rates and geopolitics a clear driver. Gold had equities had felt like they were lagging the actual price of physical gold, but it does seem as if equities are coming to the party now. Jupiter Gold & Silver topped the tables with a return of 23%.

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From a sector perspective Financials & Financial Innovation finished first with an average gain of just over 5% driven largely by strong bank earnings. Three US sectors plus technology completed the top five boosted by a strong dollar and weak pound boosting returns.

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The foot of the table was a mixed bag. With interest rate sensitive areas wobbling property funds featured with three funds in the bottom ten. And the gloss continues to fall from energy transition, well in investor’s eyes anyway, Schroder Global Energy Transition continuing to have a tough time.

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From a sector perspective Europe appears moribund with economic confidence waning and exporters spooked by US tariffs and Chinese competition. The Europe ex UK sector was the worst performer last month falling 2.7% with the European Smaller Companies sector also appearing in the bottom five. UK Gilts sector also made the table after investors took fright post this week’s budget.

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Turning to investment trusts briefly and another investment trust falls prey to a takeover bid. Unless trusts and boards do more to combat the large discounts to net asset value that many trusts trade at the sector will shrink to insignificance. Atrato Onsite Energy returned over 18% in October after the bid was announced however Tetragon Financial took sop spot with a return of 35%. The Global Income sector took top spot with a return of just over 7% - again helped by a strong dollar.

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Manager watch

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So how did UK fund managers react to the budget? The consensus for equity managers appeared to be “it could have been worse”, whilst hardly a ringing endorsement it is unlikely to de-rail the attractiveness UK equities. The Artemis equity income team were sanguine; believing the budget did nothing to detract from the fact that to international investors the UK looks to be a relatively stable, fiscally responsible entity. Their belief being the re-rating of the UK market will depend on capital returning from overseas and in that respect, they believed the budget represents further progress.

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However, bond managers have been voting with their feet and the month ended with gilt prices falling and yields hitting the highest level so far this year. There are clear concerns that inflationary measures in the budget could reduce scope for interest rate cuts and additional gilt supply will pose additional headwinds.

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Important Information

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This document is produced by Fairview Investing Ltd, an independent research consultancy. The content is for information purposes only and does not constitute financial advice. The commentary or research provided do not constitute a personal recommendation to deal. Any statements, opinions, forecasts, and figures are made by Fairview Investing (unless otherwise stated). They are considered to be reliable at the time of writing but may be subject to change.Fairview Investing accepts no legal responsibility or liability for the content of this material. The contents of the document are not to be re-produced or circulated without the express permission of Fairview Investing Ltd.

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Fairview are independent investment consultants sitting on the Investment Committee of EXE Capital Management.

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