Emerging markets outperform in a lacklustre month for equities
After a difficult October, global equity markets didn’t make up much ground in November, as the MSCI World Index (a measure of global developed markets) returned 1.2% for the month in local currency (or 1.3% in sterling). Notably, though, emerging market (EM) equities (those from countries with less-developed economies) saw a reversal of their year-to-date trend and outperformed developed market equities, gaining 3.0% in November in local currency (4.3% in GBP), according to the MSCI Emerging Markets Index. Year-to-date returns for emerging markets remain grim, but a weaker US dollar and lower oil prices helped lift EM shares in November.
Corporate earnings (particularly in the US and Europe) and many economic indicators for the third quarter continued to be solid overall, which helped tip the balance and led shares back into the black for November. But investors appeared concerned about how sustainable future growth and earnings may be, against a backdrop of slowing economic expansion, higher interest rates, and the effects of global trade protectionism.
Geopolitical tensions continued to slow the pace of the gains that global stock markets have enjoyed for close to a decade. In the United States, the mid-term Congressional elections (so called because they are held every four years, mid-way through the presidential term) and the ongoing trade dispute with China weighed on investors’ minds. In Europe, the Brexit negotiations between the UK and the European Union (EU) resulted in a tentative agreement; however, the British Parliament is not expected to vote in favour of it, leaving the future of the deal in question. The relationship between the EU and Italy, which has remained tense over the budget put forward by Italy’s coalition government, was also under scrutiny as representatives met for discussions in hopes of reaching a compromise.
US stocks recorded modestly positive results, but in the UK, shares moved lower. In Asia, Japan’s Nikkei 225 index and the Hong Kong stock exchange, the Hang Seng, were among the strongest performers during November, while Chinese equities lost ground and are now down over 20% for the year to date. Among emerging markets, India had a strong month, in part due to the falling oil price, while shares in Brazil shares rose on the positive sentiment around the country’s newly elected president. Mexico, on the other hand, endured a difficult month, after the forecast for its economy was downgraded by ratings agency Fitch.
In fixed income markets, the yield on the benchmark 10-year US Treasury fell back to 3% (meaning the price rose) as the perceived lower risk of government bonds looked more appealing to investors. Corporate bonds, on the other hand, did not fare as well, due to concerns about the effects of slowing economic growth and rising borrowing costs.
After peaking in October, oil prices fell in November as production increased significantly in the US and Saudi Arabia, and some exemptions were introduced to the sanctions on Iran. The lower oil price was also driven in part by lower expectations for future global economic growth.