T&IO Weekly Market Update

Market and Economic for week ending 25 November 2022

Please note that the below is relevant for all Prudential multi-asset funds. The tactical asset allocation comments relate to the LF Prudential Risk Managed Active and Passive ranges.

Tactical positioning

Within the LF Prudential Risk Managed Active and LF Prudential Risk Managed Passive portfolios  the portfolio manager maintains the small overweight to US equities whilst also maintaining the existing China position. The alternatives overweight remains. These positions are funded through a fixed income underweight.

Market and Economic Review

Developed and Emerging market equities finished the week in positive territory amid thin volumes during the Thanksgiving period and the first week of the Qatar World Cup. While the results for Argentina and Germany in the group stages may have left supporters agog, developments in financial markets were broadly in line with market expectations. Government bond yields declined across the board, and corporate bond spreads tightened amid improved risk sentiment. The US dollar continued its decline from recent highs, largely based on a reduction in the market’s expectations of future interest rate increases.

This week saw preliminary November PMI indices released across a number of major markets. In the UK and Eurozone, both the Services and Manufacturing parts of the economy continued to contract, but at a slower rate than forecast and an improvement on October. In Japan there was a deceleration in economic activity, with Services neither growing nor shrinking (with a reading of 50.0) and Manufacturing slipping into contraction (49.4 vs. 50.7 last month).

Meanwhile in the US, there was a broad-based deterioration in conditions, which pointed to an unexpected contraction in the Manufacturing sector. Modest optimism could be drawn from the University of Michigan’s 1-year inflation expectations index which fell from 5.1% to 4.9%, as well as October Durable Goods Orders which rose by +1.0%, ahead of the +0.4% forecast. Minutes from last month’s Federal Open Markets Committee were published on Wednesday, in line with recent comments from Federal Reserve members that it may soon be time to reduce the pace of interest rate hikes, with markets now expecting 50bps increments rather than 75bps, on the basis that the Fed wants to give the economy time to respond to the recent sharp pace of rate hikes before piling on additional monetary tightening.

This is the central bank tightrope writ large: tighten too much and drive the economy into recession. Tighten too little and inflation may remain untamed for longer. Perhaps in a nod to this conundrum, the minutes noted a fairly even split between the chances of a recession and a soft landing.

The ECB also published their last batch of meeting minutes, which contained no surprises. Committee members believe inflation remains too high and will likely remain above target for an extended time, but noted that there were no immediate signs of second-round effects, and longer-term inflation expectations remained anchored to around 2.0%. In another note of optimism, the German Ifo Business Climate index rose to 86.3 in November, which was ahead of expectations and may indicate that the German recession could be less severe than currently forecast.

In a bid to reignite its property sector, China’s largest lenders are expected to pump over $162bn of credit into the country’s property developers, seemingly pausing the ongoing deleveraging exercise efforts which have been in force for over a year and seen a number of notable defaults. This week also saw the country report its highest ever daily number of COVID cases, complicating efforts to selectively reopen the economy. Officials in the city of Zhengzhou - which boasts the country’s largest iPhone factory – were forced to restrict mobility and imposed compulsory daily testing after a spike in infections.

Goldman Sachs has agreed to pay the SEC a $4m penalty over accusations that the bank’s asset management division misled customers about ESG investments. It is understood that Goldman’s employees completed ESG questionnaires for investments in the fund, but only after the securities had already been selected for inclusion. According to the SEC, Goldman also failed to adopt written policies and procedures governing how it evaluated ESG factors as part of its investment process until “some-time after” the strategy was introduced. The fine comes not long after the SEC’s first $1.5m penalty for ESG indiscretion, and shows the increased scrutiny the regulator is applying to the area.

Economic data next week includes UK house prices, consumer credit, and retail sales, Eurozone confidence indices, Canadian GDP, and industrial production in Japan.

Outlook

The core theme for investors remains central banks’ attitudes towards the task of bringing down inflation using monetary policy tools, without excessively tightening conditions and driving economies into recession. Markets currently price in a mild contraction in economic activity but remain very sensitive to each month’s inflation print as well as the trajectory of corporate earnings growth. The ongoing economic side effects of the war in Ukraine, and the supply chains scars caused by COVID-19, provide additional complexity and uncertainty in the calibration of monetary policy.

Further Reading

This podcast  is  prepared  for  information  and  does  not  contain  or  constitute  investment  advice.  Information  provided  has  been  obtained  from  sources  that  M&G  Treasury  and  Investment Office (T&IO) believes to be reliable and accurate at the time of issue but no representation or warranty is made as to its fairness, accuracy, or completeness. The views expressed herein are subject to change without notice. No person should rely on the content or act on the basis of any matter contained in this document without obtaining specific professional advice. Neither T&IO, nor any of its associates, nor any director, or employee accepts any liability for any loss arising directly or indirectly from any use of this video. This podcast may not be edited or reproduced in whole or in part or circulated without the prior consent of T&IO and may only be used or received in accordance with the applicable laws in the relevant jurisdiction. Reference to the names of each asset class/company mentioned in this communication is merely for explaining the investment strategy, and should not be construed as investment advice or investment recommendation of those companies.

The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back less than the original amount invested and past performance information is not a guide to future performance. By listening to the podcast, you agree to be bound by the foregoing limitations.

‘M&G Treasury & Investment Office (T&IO)’ includes the team formerly known as Prudential Portfolio Management Group (PPMG). Prudential Portfolio Management Group Limited, is registered in England and Wales, registered number 2448335.