Chart Of The Week   November 01 2021

October In Review

October In Review

The stock-bond relationship was restored in October after it broke down in the prior month. Specifically, it paid off to favor stocks over bonds. US and aggregate global equities generated the greatest abnormal returns while global bonds suffered the greatest abnormal losses. More broadly, the theme underpinning market dynamics in October is that pro-cyclical financial assets benefitted relative to defensive ones.

Most major equity indices experienced above-average gains. The main exceptions are Japanese stocks and EM ex-China equities. Notably, this is a shift from dynamics in September during which Japanese stocks were the only major equity market to enjoy positive abnormal returns and EM ex-China equities fared relatively better than most other major equity markets in terms of their z-score.

Aside from equities, industrial commodities such as metals and oil performed exceptionally well in October. In the currency space, the countercyclical USD depreciated in trade-weighted terms and experienced above average losses.

Going forward, we continue to expect the macro landscape to benefit the more pro-cyclical financial assets. This calls for an overweight allocation to global stocks versus bonds. However, these gains are likely to be skewed towards DM bourses. China’s real estate sector faces headwinds and policymakers are unlikely to stimulate the economy aggressively (see The Numbers). China’s economic slowdown also dims the outlook for EM risk assets. Meanwhile, the US dollar will come under downward pressure as the cyclical expansion endures. Investors should maintain a below-benchmark portfolio duration as central banks normalize monetary policy. That said, a period of receding inflationary pressures may prompt bond yields to pause in their climb higher (see Country Focus).