October was a month in which geopolitical risk dominated headlines. Escalating tensions in the Middle East, with devastating civilian implications have shocked the world. Volatility picked up as a result of this conflict, with the longer-term implications as yet unknown. Bond markets were at the centre of this volatility, with US 10-year bond yields crossing the psychologically important 5% mark for the first time since 2007. Bond yields rose from a confluence of reasons, including: messaging from central banks that rates would be ‘higher for longer’, strong economic data with US Q3 GDP coming in at 4.9% on an annualised basis, and the market having to absorb more supply from the Treasury to fund fiscal spending in the US.
In the face of higher bond yields, and a broad tightening of financial conditions, equities were weaker over the month, with Global Equities falling 2.4% in sterling terms. Sustainable equities were also impacted by sector specific factors over the month, including profit warnings from several wind turbine manufacturers impacting the broader environmental theme. The US was the strongest region, as it has been for much of the year.
Within fixed income, we continue to be defensively positioned. Given most of the fixed income move was focused on the longer end of the yield curve, our holding in Sustainable Development Bank bonds added value on a relative basis over the month. We have been adding to US Inflation linked bonds following the sharp rise in real yields, that should stand to benefit from either slowing growth or stubborn inflation.
Diversifying assets added value over the month and continue to exhibit very low correlation to equity and bond markets. A position in a strategy that benefits from the steepening of the US yield curve, by going long two-year bonds and short 10-year bonds added value in October.