Robust economic data from the US got equity markets off to a poor start in October 2023 as the resilience demonstrated by this all-important economy fully supported the on-going thesis of higher for longer as far as interest rates were concerned. First it was the ISM Factory Purchasing Managers Index which, although still below 50 and therefore pointing toward contraction, delivered the 3^rd month of improvement in a row, resulting in a surge for US Treasury yields. Next came the jobs data which showed the number of US vacancies increasing, once again equities fell and yields surged. Indeed, toward the end of the month the US 10-year Treasury breached 5% for the first time since 2007. Elsewhere the economic picture was less rosy. For Europe in particular there already was little expectation for much GDP growth and for Germany in particular the economy is likely to decline over the full year. This was reinforced by industrial production figures seen in the month which highlighted a continuing haemorrhaging. In an interview, Christine Lagarde the ECB President nicely encapsulated the situation stating that “Germany had built its economic model on very cheap energy supplies and on export opportunities, especially in China”. She then went on to describe the contagion this has on the whole Euro Bloc. Slightly contradicting this was China’s Caixin Survey of manufacturing and services which returned to expansionary territory. Still only one data point and this economy remains mired in weak consumer confidence and an on-going property crisis so is unlikely to bail out Europe in the short term.

While the third quarter reporting season got well underway over the course of the month, this was somewhat overshadowed by the attacks on Israel and the subsequent military response. The knee jerk reaction came from the oil price which rose strongly only to retrace much of the move by month end. While the events are tragic, it would require the conflict to spread out-with the borders of Israel and Gaza to have a meaningful impact on stock markets.

Towards month end the scheduled ECB meeting resulted in no change to interest rates for the region, potentially a significant moment following 10 back-to-back hikes since July 2022. With the 4% level now seen as making, according to the ECB, a “substantial contribution” in bringing inflation down to the targeted 2% level, this does not necessarily contradict “higher for longer” as the first cut could still be a long way off.

Markets were spooked by the rise in bond yields with the MSCI Europe ex UK Index falling 3.0% and the Fund by 5.1% over the course of the month. The portfolio performance was particularly hit by companies who reported third quarter earnings which did not meet the markets demanding standards such as Aixtron, a manufacturer of machinery for the semiconductor industry, Kion Group a producer of forklift trucks and Verallia a glass container manufacturer. While the reports in all cases contained little in the way of surprise and guidance was maintained for full year earnings, they also pointed to issues which suggested more of an uphill struggle to meet these targets. In the case of Aixtron orders were lower than previous quarters, for Kion a higher financial result, and for Verallia pricing overcompensating for a drop in volume. On a more positive note, electronic car parts producer Vitesco rose by over 15% following a takeover bid from major shareholder Schaeffler. We chose to sell the shares as a competing bid is highly unlikely as a result of the shareholder structure.

Robust economic data from the US got equity markets off to a poor start in October 2023 as the resilience demonstrated by this all-important economy fully supported the on-going thesis of higher for longer as far as interest rates were concerned. First it was the ISM Factory Purchasing Managers Index which, although still below 50 and therefore pointing toward contraction, delivered the 3^rd month of improvement in a row, resulting in a surge for US Treasury yields. Next came the jobs data which showed the number of US vacancies increasing, once again equities fell and yields surged. Indeed, toward the end of the month the US 10-year Treasury breached 5% for the first time since 2007. Elsewhere the economic picture was less rosy. For Europe in particular there already was little expectation for much GDP growth and for Germany in particular the economy is likely to decline over the full year. This was reinforced by industrial production figures seen in the month which highlighted a continuing haemorrhaging. In an interview, Christine Lagarde the ECB President nicely encapsulated the situation stating that “Germany had built its economic model on very cheap energy supplies and on export opportunities, especially in China”. She then went on to describe the contagion this has on the whole Euro Bloc. Slightly contradicting this was China’s Caixin Survey of manufacturing and services which returned to expansionary territory. Still only one data point and this economy remains mired in weak consumer confidence and an on-going property crisis so is unlikely to bail out Europe in the short term.

While the third quarter reporting season got well underway over the course of the month, this was somewhat overshadowed by the attacks on Israel and the subsequent military response. The knee jerk reaction came from the oil price which rose strongly only to retrace much of the move by month end. While the events are tragic, it would require the conflict to spread out-with the borders of Israel and Gaza to have a meaningful impact on stock markets.

Towards month end the scheduled ECB meeting resulted in no change to interest rates for the region, potentially a significant moment following 10 back-to-back hikes since July 2022. With the 4% level now seen as making, according to the ECB, a “substantial contribution” in bringing inflation down to the targeted 2% level, this does not necessarily contradict “higher for longer” as the first cut could still be a long way off.

Markets were spooked by the rise in bond yields with the MSCI Europe ex UK Index falling 3.0% and the Fund by 5.1% over the course of the month. The portfolio performance was particularly hit by companies who reported third quarter earnings which did not meet the markets demanding standards such as Aixtron, a manufacturer of machinery for the semiconductor industry, Kion Group a producer of forklift trucks and Verallia a glass container manufacturer. While the reports in all cases contained little in the way of surprise and guidance was maintained for full year earnings, they also pointed to issues which suggested more of an uphill struggle to meet these targets. In the case of Aixtron orders were lower than previous quarters, for Kion a higher financial result, and for Verallia pricing overcompensating for a drop in volume. On a more positive note, electronic car parts producer Vitesco rose by over 15% following a takeover bid from major shareholder Schaeffler. We chose to sell the shares as a competing bid is highly unlikely as a result of the shareholder structure.