Executive Summary
- The Iran conflict continued to dominate the economic outlook, with renewed disruption to energy supplies pushing oil prices higher and increasing the risk of persistent inflation.
- The Federal Reserve held interest rates at 3.75%–4.0%, while the Bank of England’s next decision is due in early November. Expectations of further rate cuts have weakened considerably.
- US technology shares suffered a difficult month as investors questioned whether the enormous sums being invested in artificial intelligence will generate sufficient returns.
- UK and European equities proved more resilient, with both markets benefiting from more attractive valuations and exposure to a broader range of sectors.
- Higher bond yields and falling gold prices have created some short-term volatility, but also underline the importance of diversification and taking a longer-term view.
Iran: Energy Prices Continue to Drive Markets
The conflict involving Iran remained a central influence on financial markets throughout October. Despite continued diplomatic activity and occasional suggestions that a settlement could be within reach, there has been little evidence of a lasting resolution.
The Strait of Hormuz remains a critical concern. Although some oil flows have recovered, shipping risks, insurance costs and disruption to established trading routes continue to restrict the normal movement of energy supplies. October also saw renewed attacks on commercial shipping and further concerns about the security of regional infrastructure.
Oil prices rose sharply during the month. Brent crude gained approximately 14% in October, with the December futures contract settling at $117.64 a barrel on 30 October. Analysts have also increased their expectations for the average oil price over the year, reflecting the likelihood that energy markets will take time to return to normal.
The economic consequences are becoming increasingly clear. Higher oil and fuel prices feed directly into transport and production costs, but their effects do not stop there. Businesses may eventually pass higher costs on to customers, while households have less disposable income to spend elsewhere.
This creates a difficult environment for central banks. Higher interest rates may be needed to prevent a temporary energy shock from becoming embedded in wages and prices, but increasing borrowing costs also risks weakening economic growth.
The repeated optimism surrounding potential peace negotiations has also made markets particularly sensitive to political announcements. Investors need to distinguish between statements suggesting that an agreement is close and tangible evidence that energy supplies and shipping routes are returning to normal.
Until that happens, geopolitical risk is likely to remain an important influence on oil prices, inflation and investment sentiment.
Global Equities Context
October was a month of considerable divergence between equity markets.
The most notable development was the weakness in US technology shares. The Nasdaq 100 had fallen by more than 5.8% by 30 October, with more than $2 trillion in market value at risk of being wiped from the index during the month. Investors became increasingly concerned about the scale of spending by the largest technology companies on artificial intelligence and, crucially, how long it might take to generate adequate returns.
This is an important development. For some time, the enthusiasm surrounding AI has supported valuations across a relatively small number of very large companies. However, the investment required to build data centres, purchase specialist chips and develop AI infrastructure is enormous. Investors are now looking beyond the headline growth figures and asking whether the returns will justify the expenditure.
European shares had a much better month overall, despite weakening towards the end of October as concerns about US technology spending spread across global markets. The pan-European STOXX 600 recorded its strongest monthly performance since June, supported by encouraging corporate earnings.
The FTSE 100 also finished October higher, recording its first monthly gain in three months and rising by more than 1%. This was a positive result given the pressure from higher oil prices and bond yields.
The broader message is that global equity markets are not moving in unison. The concentration of returns in US mega-cap technology has been a major feature of recent years, but October demonstrated the benefits of having exposure to other regions and sectors.
Our view remains that investors should be looking beyond the most expensive areas of the market. There are attractive businesses and investment opportunities in the UK, Europe and Asia, where valuations can offer a more compelling balance between risk and potential return.
Central Banks: Inflation Takes Centre Stage
The prospect of falling interest rates has become less certain as energy prices continue to rise.
In the United States, the Federal Reserve held its target interest rate range at 3.75%–4.0% at its October meeting. The decision was not unanimous, with two members preferring a further quarter-point increase. The Fed acknowledged that economic activity remained strong and that inflation was still elevated.
This is a significant change from the expectations investors held earlier in the year. Rather than anticipating a steady series of rate cuts, markets are now having to consider the possibility that rates may need to remain higher for longer, or even increase again if inflation proves persistent.
In the UK, the Bank of England did not hold a further meeting in October, with its next interest-rate decision scheduled for 5 November. Bank Rate remains at 3.75%, following September’s decision to hold rates. That meeting was notable because three members of the Monetary Policy Committee voted for an increase to 4.0%, reflecting concerns about the inflationary consequences of the energy shock.
The latest UK inflation figures added to those concerns. CPI inflation increased from 3.1% in August to 3.5% in September, with higher transport and fuel costs making a significant contribution.
For investors, the important point is that the direction of interest rates is no longer straightforward. The outlook will depend heavily on how long energy prices remain elevated and whether higher costs begin to feed into wider prices and wages.
UK: Growth Holds Up, But Inflation Is a Concern
The latest UK economic figures have provided some encouragement.
GDP grew by 0.1% in August, following growth of 0.4% in July and 0.4% in June. Looking at the three months to August, the economy expanded by 0.7%, with services providing the largest contribution. However, construction and production remained weaker areas.
This suggests that the UK economy has been more resilient than some had feared, although the outlook remains challenging.
Higher energy prices are likely to put pressure on household budgets and business costs, while the prospect of interest rates remaining elevated will weigh on borrowing and investment.
The Bank of England must therefore balance the need to control inflation against the risk of damaging an economy that is still experiencing relatively modest growth.
The UK Budget also took place at the end of October. I will cover its implications separately, but from an investment perspective the broader issues remain the cost of government borrowing, the level of public debt and the need to maintain confidence in the UK’s fiscal position.
Despite these economic challenges, we continue to believe that UK equities offer attractive long-term value. The FTSE 100 is made up of many internationally focused businesses, and its performance should not be judged solely by the health of the domestic economy.
Other Viewpoints
Cash
Cash continues to offer a reasonable level of income, particularly for investors who value certainty and immediate access to their money.
However, the expectation that interest rates would steadily fall has become less convincing. This may provide some support for cash returns in the short term, but it is important not to assume that today’s rates will remain available indefinitely.
For longer-term investors, cash should remain a strategic holding for liquidity and short-term needs rather than a substitute for a properly diversified investment portfolio.
Fixed Interests
Government bond markets remain under pressure from higher inflation expectations and the prospect of interest rates staying elevated.
This has been uncomfortable for existing bondholders, as rising yields generally mean falling bond prices. However, the other side of this movement is that new investors can now access more attractive yields than were available earlier in the year.
We continue to see opportunities in fixed interest. If inflation eventually moderates and central banks are able to reduce interest rates, existing bonds could benefit from capital appreciation as well as the income they provide.
The key is to remain selective and consider the duration and credit quality of investments rather than simply chasing the highest available yield.
Alternatives
Gold experienced another difficult month, falling by approximately 4.3% in October and reaching its lowest level since July. Higher oil prices and inflation concerns have increased expectations of further US interest-rate rises, while the prospect of higher returns from interest-bearing assets has reduced some of gold’s appeal.
This is a useful reminder that gold does not always rise during periods of geopolitical uncertainty. Its price is influenced by several factors, including real interest rates, the US dollar and investor demand.
We continue to view gold and other real assets as potential portfolio diversifiers, rather than investments that should be expected to rise every month. Given the strong performance gold has enjoyed over a longer period, investors should also remain conscious of valuation and the risk of buying after a substantial rally.
UK Shares
The FTSE 100 rose by more than 1% in October, recording its first monthly gain in three months.
UK equities continue to offer an attractive combination of valuation and international earnings exposure. The index includes major businesses across financial services, healthcare, energy, consumer goods and mining.
This gives investors exposure to a broad range of global economic activity, rather than simply the UK domestic economy.
We remain positive on the UK market relative to the US, where valuations and concentration remain more challenging.
US Shares
The US market was the main source of equity market weakness in October, particularly within technology.
The Nasdaq 100’s decline of more than 5.8% during the month reflects growing investor concern about the amount of capital being committed to artificial intelligence. Companies are increasing their investment plans, but the market is becoming more demanding about the evidence of future profitability.
We remain positive about the long-term potential of AI. It is likely to transform many industries and create significant investment opportunities. However, that does not mean every company involved in the sector will be successful, or that today’s valuations will prove justified.
The US remains an important component of a diversified portfolio, but we believe investors should be cautious about excessive exposure to a small number of very large companies.
Our view remains that the relative attractiveness of other developed markets has improved.
European Shares
European equities had a strong month overall, with the STOXX 600 recording its best monthly performance since June, despite a late-month setback.
The region continues to offer more reasonable valuations than the US, with opportunities across industrials, financials, healthcare and consumer businesses.
European companies may also benefit if investment and earnings growth broaden beyond the US technology sector.
We remain positive on the longer-term outlook, while recognising that higher energy prices and political uncertainty in individual countries remain risks.
Asian Shares
Asia continues to offer an important source of diversification and long-term growth.
Japan remains attractive because of ongoing corporate governance reforms, improving shareholder returns and a greater focus on capital efficiency.
India continues to offer a compelling structural growth story, supported by demographics, infrastructure investment and domestic consumption. Indian equities also performed positively in October, with the Nifty 50 rising 1.9% and the Sensex gaining 2.7%. Technology shares were particularly strong.
China remains more difficult to assess. Its property market and structural economic challenges are still relevant, but its investment in technology, manufacturing and productivity continues to create opportunities.
We believe investors should maintain exposure to Asia as part of a diversified global portfolio, while remaining selective about individual markets.
Emerging Markets
Emerging markets remain sensitive to movements in the US dollar, global interest rates and commodity prices.
Higher oil prices can be particularly challenging for countries that rely heavily on imported energy, while exporters may benefit from stronger commodity prices.
India’s positive performance in October demonstrates that emerging markets should not be viewed as one uniform investment opportunity. Individual countries have different economic drivers, growth prospects and vulnerabilities.
We continue to favour a selective approach, recognising the long-term growth potential while maintaining appropriate diversification.
House View Bias Scale
October reinforces our preference for diversification and relative value. Our broad positioning remains:
UK Shares — Overweight
Attractive valuations, international earnings exposure and a broad range of sectors.
European Shares — Overweight
More reasonable valuations than the US, with opportunities across a range of industries.
Asian Shares — Overweight
Strong long-term structural growth, particularly in India and Japan, with selective opportunities in China.
Emerging Markets — Neutral to Overweight
Attractive long-term growth potential, but sensitive to global liquidity, the dollar and commodity prices.
US Shares — Neutral
High-quality businesses remain attractive, but elevated valuations and concentration risk warrant caution.
Fixed Interest — Increasingly Attractive
Higher yields provide better income opportunities and the potential for capital gains if interest rates eventually fall.
Cash — Neutral
Useful for liquidity and short-term certainty, but not a long-term replacement for investment.
Gold and Alternatives — Neutral
Useful diversifiers, although recent volatility and valuation considerations argue against an excessive allocation.
Highlights & Risks
Highlights:
- UK and European equities demonstrated resilience, with both markets outperforming the weaker areas of the US technology sector.
- Higher bond yields are creating more attractive income opportunities for investors prepared to take a longer-term view.
- India’s equity market delivered positive returns, supported by strength in its technology sector and encouraging corporate earnings.
- The continued development of AI, infrastructure and productivity-enhancing technology offers significant long-term investment opportunities.
Risks:
- The Iran conflict and disruption to energy supplies continue to create the risk of higher and more persistent inflation.
- Central banks may be forced to maintain or increase interest rates if energy costs become embedded in wider prices and wages.
- US technology valuations remain vulnerable if the profits generated by AI investment fail to meet expectations.
- Higher government borrowing costs and elevated public debt could create further pressure on bond markets and economic growth.
Conclusion
October has been a reminder that markets can change direction quickly when expectations become stretched.
The enthusiasm surrounding artificial intelligence has supported US equities for some time, but investors are now demanding stronger evidence that the enormous investment being made will translate into sustainable profits. At the same time, the continuing Iran conflict has pushed energy prices higher and made the inflation outlook more uncertain.
This combination of higher borrowing costs and greater scrutiny of company valuations creates a more challenging environment for investors.
However, we do not believe this means that investors should retreat from markets. Instead, it reinforces the importance of diversification and looking for value in areas that have not enjoyed the same level of attention as US mega-cap technology.