OCM Commentaries

Market Commentary: 24th November 2021

By November 24, 2021 November 29th, 2021 No Comments

With speculation over central bank policy and rising covid cases dominating headlines around the world, markets experienced another volatile week, with risk assets weighing on performance. Against this increasingly uncertain backdrop, the OBI portfolios benefitted from a more cautious short-term allocation approach, with elevated cash levels helping to mitigate some of the volatility within asset prices over the week.


Given limited data flows over the weekly time frame, investors focused their attention on Joe Biden’s decision to renominate Jerome Powell as Chair of the Federal Reserve, and how this may impact policy decision making moving forward. Jerome Powell getting a second term as Fed Chair has been seen as a positive for financial markets in the short term, and this should help to relieve some investor uncertainty as we head towards the year-end. Had Biden appointed Lael Brainard, the democratic front-runner, financial markets would have likely had to adjust to a differing policy approach, risk tolerance, as well as policy-making language, which would have led to policy forecast adjustments. That being said, with greater clarity on the Fed leadership, we have still seen adjustments be made to monetary policy forecasts over the next 12 months, as investors are increasingly speculating that monetary policy decision making could be brought forward due to Powell’s renomination. Outside of the US, investors have been focused on the acceleration in Covid-19 case numbers in Europe, with investors beginning to price in localised lockdowns and possibly subdued demand as cases worsen over the winter months. These events have helped contribute to the risk-off sentiment experienced within financial markets.


Within US equity markets, Tech stocks faced a strong sell-off in the weekly time frame due to their sensitivity to rising interest rates. This has been caused by Jerome Powell’s renomination as Fed Chair as mentioned above, and it is expected to result in a more hawkish tilt to Fed policy than if Lael Brainard had been chosen. The renomination has come at a time when soaring inflation is adding some urgency to policy action from the Federal Reserve, and a growing number of investors are now pricing in a 25-basis point rate hike into the June 2022 Federal Reserve meeting.


Continental Europe has been the worst performing region in the dataset, with Germany leading the regional Covid-19 case count. The rise in Covid-19 cases is most prominent within Germany, France, Belgium, and the Netherlands, with a handful of regions expected to decide on whether to implement tougher Covid-19 restrictions in the middle of the week. The Stoxx 600 was most susceptible to a fall in risk asset prices given its partial allocation to smaller market cap firms, albeit all of the European equity indices analysed dropped significantly.


UK equities underperformed over the past seven days, albeit UK large caps performed better than their continental European peers. UK assets have benefitted from being discounted to other regional assets in recent months and, with UK Covid-19 cases remaining range-bound rather than accelerating, are maintaining their attractiveness compared to other regions for investors.


On the other hand, equities within Asia continued their short-term outperformance on the back of favourable data flows and changing investor sentiment. The lack of additional regulatory pressures within China has improved investor sentiment, leading to investors capitalising on attractive valuations. Within Japan, improving factory activity and discounted valuations contributed to the favourable macroeconomic environment as the new premier prepares to implement supportive policy decisions.


Non-equity sectors also followed equities downward this week, with rising interest rate expectations and strong inflationary pressures remaining on investors’ minds. That being said, index-linked gilts were the weakest performer in the past seven days, while the remaining non-equity sectors performed better than last week.


Portfolio Performance

While the OBI portfolios and their associated benchmarks all fell this week, all the OBI portfolios fared better than their respective benchmarks, owing to their higher cash weightings as we navigate year-end uncertainty within financial markets. Within the lower risk portfolios, our property and strategic bond exposure benefitted over the week, while our multi-asset and equity exposure followed the performance of the indices below. Within the higher risk portfolios, our exposure to US small and mid cap companies and value-oriented exposure contributed gains to the OBI portfolios, while our exposure to Europe as well as smaller companies placed downward pressure on portfolio performance. Consequently, the performance of the OBI portfolios remains above their annualised performance targets, which we remain focused on protecting as we manage excess market volatility throughout the economic cycle.


Portfolio Positioning

Given that much of 2021 is now behind us, it is beneficial to reiterate our forward-looking outlook, as well as what may impact portfolio performance and allocation as we approach the year-end. Last week we reiterated a handful of key events that are approaching which we expect to improve clarity on the macroeconomic and policy environment as we transition into 2022. These include Bank of England and Federal Reserve interest rate decisions, economic data flows, supply chain disruption data and Covid-19 case rates. Once these short-term events pass and the outlook becomes clearer, we are expecting to make a handful of changes to the OBI portfolios as we return to normal portfolio allocations. We expect this to take place in three stages, with the first stage taking place before year-end if the conclusion of the events listed above improves our clarity surrounding financial market conditions. The Subsequent stages are expected to take place at the beginning of 2022, which will provide us with the opportunity to capitalise on well-positioned investments as we begin another year.


Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value.  You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio.  The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations.  Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges and trading spreads.  Unless stated, income is reinvested into the portfolio.  The information contained in in this document is for information purposes only.  It does not constitute advice or a recommendation or an offer or solicitation for investment.


Key Events We Are Watching This Week:

  • Monday 29th: EU Consumer Confidence, November.
  • Friday 3rd: Non-Farm Payrolls, November.


This Day in History

On this day in 1718, the English pirate Blackbeard was killed off the east coast of North America.


Thank you for reading, have a great week!

Jason, Gina & Ben