Highlights
- October was a challenging month for markets as investors weighed the scale of AI investment, political uncertainty in Europe and geopolitical tensions.
- More defensive income assets helped cushion market volatility, while fixed income assets benefited from a decline in yields from their October highs.
- Amid ongoing volatility and following strong year-to-date performance, we took some profit in our tactical portfolios and increased cash levels on a short-term basis. This reflects near-term uncertainty and leaves us better placed to act if opportunities arise.
Markets and Portfolio Positioning
Global equity markets faced a challenging backdrop in October. Investors continued to assess whether substantial investment in AI will translate into stronger profits, while political uncertainty in France and some disappointing company results also weighed on sentiment. Beneath the headline market moves, leadership shifted as investors moved away from some highly valued technology companies and towards more defensive areas. This contributed to a notable difference between the performance of market-cap-weighted and equal-weighted US equity indices.
Geopolitical developments, including the war in Iran and its effect on energy prices, also influenced investor sentiment. Amid ongoing market volatility and following strong year-to-date performance, we took some profit in our tactical portfolios and increased cash levels on a short-term basis. This reflects near-term uncertainty and gives us flexibility to prepare for opportunities that may arise.
Technology Sector and AI Investment
Technology has played an important role in equity market gains over recent years. The rapid growth of AI investment has coincided with strong economic growth and earnings momentum. At the same time, market performance has become increasingly concentrated in a relatively small number of very large companies. This concentration can increase the impact of company-specific news and contribute to greater short-term volatility.
We have remained cautious about valuations across parts of the technology sector, particularly after strong market momentum pushed a number of share prices to record levels.
US Midterm Elections
The war in Iran has been an important influence on investor sentiment, with oil prices a particular focus as Iran continues to deny cargo ships safe passage through the Strait of Hormuz. As the US midterm elections approached, speculation about further US strikes on Iran contributed to a rise in oil prices. Brent crude rose above $118 a barrel during the month, renewing concerns about global inflation.
The Democrats’ gains in the midterm elections included victories in areas that had previously supported the Republicans. The result points to public dissatisfaction with the President amid ongoing trade disputes and a turbulent geopolitical backdrop. It also raises questions about whether the President will place greater emphasis on foreign affairs in response to a more challenging domestic environment, and whether he may take a more forceful approach to trade negotiations. The situation in Iran remains a more immediate concern for investors. Although the President has played down the prospect of imminent military strikes, the direction of US foreign policy remains uncertain.
The election result may also have implications for the expansion of AI data centres, with declines in key AI-related stocks in recent days. Many Democratic candidates called for greater oversight of these energy-intensive facilities. The result could also make a major increase in government spending less likely. Although challenges over the debt ceiling may lie ahead, this could limit the amount the President can spend, potentially supporting US government bonds.
UK Economy and Interest Rates
We have covered the Autumn Budget in previous updates, so will focus on the main points here. The Budget offered limited support to households facing higher living costs, while aiming to maintain confidence in the Government’s approach to public finances.
Investors responded positively to the relatively modest Budget measures. The Government’s 2027 Spending Review should give more detail on how it plans to pay for higher defence spending while keeping borrowing under control.
Higher oil and gas prices have added to inflation concerns and increased pressure on central banks to raise interest rates. UK inflation reached 3.5% in September. The expected rise of more than 20% in the Ofgem energy price cap in January could add further pressure. Earlier today, the Bank of England’s Monetary Policy Committee raised interest rates by 0.25 percentage points to 4%, with eight members voting in favour and one against. Inflation remains a concern while the war in Iran continues.
Market Developments Across Asset Classes
October highlighted the importance of diversification across markets and asset classes. Weakness in key technology shares was offset by strength in the UK and some parts of Europe.
Fixed income markets faced pressure from rising inflation concerns and ongoing fiscal uncertainty. European bonds came under pressure as political uncertainty in France weighed on the region. UK yields, by contrast, benefited from a largely benign Autumn Budget and greater confidence in the country’s fiscal position.
A recovery in fixed income markets supported income and capital appreciation across the asset class. The broad range of bond markets and issuers continues to offer investors diversification.
Looking Ahead
With markets reacting quickly to political and economic developments, we expect uncertainty to remain part of the investment landscape. We are focused on staying adaptable, using the flexibility in our tactical portfolios to respond as conditions evolve and potential opportunities emerge.
Our decisions continue to be guided by clients’ long-term objectives. Rather than make changes in response to every market swing, we aim to invest with care and maintain portfolios that can navigate different conditions over time.
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 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. 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. OCM Wealth Management Limited is authorised and regulated by the Financial Conduct Authority (FCA Registration No: 418826) OCM Asset Management is a trading name of OCM Wealth Management Limited
