Written by Cormac Nevin
Last week was a challenging one for markets, with the MSCI All Country World Index of global equities down -2.6% in both GBP and local currency terms. It was a broad-based selloff across various global equity markets, while global treasury bonds, credit and high yield bonds were also down modestly.
While geopolitics currently dominate the headlines, with certain markets wary of an escalation of tensions in the Middle East, it is likely that the challenge faced by markets is found closer to home. Over the last six months the “real” rate of interest, which is the rate of interest in excess of the expected inflation rate, has reverted to highs not seen since 2008. For example, the five-year real interest rate in the U.S. reached 2.4% over the month of October.
As inflation is increasingly looking like a risk that is now in the rear-view mirror, markets and economies more broadly are having to contend with a sharp increase in the cost of financing instituted by central banks. The impact is being seen globally as consumers and companies alike re-adjust to the new economic reality. House price sales in the U.S. are now at a 27-year low, as homeowners are reticent to move from mortgages fixed at multi-decade lows in years prior to the current mortgage rate of approximately 8%. In the UK, the number of property transactions has also slowed to the lowest rate in years. Other components of the economy are also facing pockets of challenge, as corporate bankruptcy filings increase and the Private Equity complex resorts to alternative financing sources to meet commitments as they fall due.
While pockets of the economy appear challenged as outlined above, we should be mindful that it is likely that an excellent total return opportunity has presented itself as yields on liquid, high-quality government bonds are at multi-decade highs and could realise appetising gains should central banks be forced to cut rates in the face of economic weakness.
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All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 23rd October 2023.
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