Our investment experts highlight the key events in October – bond market underperformance, equity market volatility and the UK Budget – discuss their impact on multi-asset portfolios and share what investors might expect in the coming months.
Top three investment trends
1. Bonds struggle on strong data and fiscal worries
October was a weak month for fixed income markets with global bonds delivering their worst monthly performance since 2022. This was largely driven by resilient US macroeconomic data at the start of the month, leading to higher market expectations for interest rates and inflation, as well as fiscal concerns across developed economies. In terms of macro data releases, US unemployment dropped to 4.1 per cent, third-quarter (Q3) GDP growth remained strong at 2.8 per cent and monthly US consumer price inflation (CPI) saw its largest increase in six months.
Consequently, bond yields rose, driving bond prices down, as markets began to expect key central banks – the US Federal Reserve (Fed), the Bank of England (BoE) and the European Central Bank (ECB) – to slow the pace of interest rate cuts for the rest of this year. And US Treasury yields went up as investors positioned portfolios for a potential Republican sweep (Trump winning the Presidency, the Senate, and the House of Representatives). In the UK, gilt yields also rose as the market braced for the UK budget to increase government borrowing.
2. Equity market volatility returns
Equity markets also struggled in October, with the S&P 500 posting negative monthly returns for the first time in six months, in USD terms. This came despite a mid-month rally which saw US equities reach a new all-time high for the 47th time in 2024 – a by-product of strong initial company earnings and stronger than expected US macroeconomic data (see the section on bonds).
The S&P 500 posted negative monthly returns for the first time in six months
However, this swiftly reversed following mixed Q3 earning results from some of the Magnificent-Seven (Mag-7) companies, with the Mag-7 index down by 0.5 per cent in October. Microsoft, Meta and Apple stocks all sold off after publishing their results; given their huge capital investment in artificial intelligence (AI) infrastructure to date, the outlooks on their AI-related businesses disappointed investors.
The US election also fed into equity market volatility over the month as betting polls continued to spotlight a tight race between Harris and Trump. Investors bought protection on equities for the period following the election result, positioning themselves for more potential volatility.
To note, weakness in the British pound (GBP) following the UK Budget meant sterling investors saw positive returns from the US equity market for the month.
3. The UK budget sends gilt yields higher
The highly anticipated UK budget was delivered on October 30. It was Labour’s first budget in over 14 years. The government presented a “tax and spend” strategy to help address a reported £22 billion fiscal black hole, with a plan to raise taxes by £40 billion a year, specifically through business taxes like employer National Insurance Contributions. Fiscal rules were also changed to fund increased spending towards public services.
Gilt yields increased to their highest level since November 2023
After rising ahead of the announcement, gilt yields fell immediately afterwards, as the lack of any major surprise reassured investors; Labour’s proposals had all been either explicitly flagged by the Chancellor or speculated about in the press. However, as investors digested the information, alongside the Office for Budget Responsibility’s longer-term growth forecasts, gilt yields increased to their highest level since November 2023, leading to gilts ending October down by 2.7 per cent (see Figure 1).
Figure 1: October 2024 market performance (GBP terms, per cent)
Past performance is not a reliable indicator for future performance.
Note: All returns are in GBP and fixed income is GBP hedged.
Source: Source: Aviva Investors, Morningstar. Data as of October 31, 2024.
How did we position MAF Core and MAF Plus portfolios?1
Growth assets
Equity markets struggled in October, with the majority ending in negative territory for the month. Sterling investors, however, had positive returns from global and US equity markets due to GBP weakness. Japanese equities were an exception to the general market sell-off, posting slightly positive returns due to weakness in the yen, triggered by uncertainty around the formation of Prime Minister Ishiba’s parliamentary coalition.
Sterling investors had positive returns from global and US equity markets due to GBP weakness
Within MAF Plus, our overweight position in North American equities positively contributed to returns, whilst our overweight position in European equities detracted.
In October, we maintained our overweight in equities but redistributed our regional exposure in MAF Plus by trimming our European allocation in favour of US equities, for which relief over US growth risks should be more supportive.
Defensive assets
Global bonds delivered their worst monthly performance since 2022 on the back of stronger than expected US GDP, jobs and inflation data, and increased concerns about government spending. Although the BoE and Fed cut rates by 25 basis points (bps) at their meetings, held on November 6 and 7 respectively, investors have reduced their expectations for significant rate cuts for the rest of the year.
Our expectation is that market focus should now shift back to the BoE’s rate cutting cycle
In MAF Plus, an overweight position in UK gilts detracted in October, although this was partially offset by an underweight position in Japanese government bonds. However, during the month, we reduced our overweight position in gilts to diversify our fixed income exposure as we approached the UK budget and assessed the upside risks to yields. This exposure was reallocated into US Treasuries, which had sold off more over the course of October. We were then able to tactically re-enter into gilts following the UK budget announcement, after a relatively pronounced sell-off. This aligns with our expectation that market focus should now shift back to the BoE’s rate-cutting cycle.
Alternative assets
Alternative assets within MAF Plus performed well in October, driven by our exposure to gold. In a context of economic and geopolitical uncertainty, gold has outperformed other commodities, reaching a new all-time high at the end of October.
We reallocated our holding in the Aviva Investors Global Convertibles Absolute Return Fund into US 10-year Treasuries.
Market outlook and positioning
Both MAF Core and MAF Plus take a global approach to multi-asset investing, offering a more diversified profile than regional multi-asset portfolios. Looking ahead, we think equities have the potential to perform well in a disinflationary environment in which central banks are cutting interest rates, although we will continue to monitor economic activity for signs of broader weakness. Regarding fixed income, central bank easing biases and the renewed focus on growth risks are likely to place a ceiling on bond yields. In this scenario, fixed income is well-positioned to offer diversification within the portfolios.
US equities have maintained strong valuations as companies have continued to deliver robust earnings
From an active asset allocation perspective in MAF Plus, we maintain a long position in equities with a preference for more focused exposure within certain regions. We remain overweight in US and European equities. Despite recent volatility, US equities have maintained strong valuations as companies have continued to deliver robust earnings, albeit slightly below market expectations, which were very high. European equities look attractive from a valuation perspective, with promising signs these companies can deliver better growth.
Regarding our fixed-income allocation, we are short Japanese government bonds, with overweight positions in UK gilts and US Treasuries. We believe Japan is still in a hiking cycle given increasing inflationary pressures in the country, with the potential for another rate hike to be delivered in December. In the UK, inflation is falling and, while UK growth has started to recover, it is still weak compared to other developed economies. Therefore, we believe our gilt position could benefit from the potential for the BoE to deliver more rate cuts than other developed central banks. Having increased exposure to US Treasuries last month will provide more diversification within the portfolios’ fixed income allocation.
