November 2023 marked a favourable turn of events for investors in financial markets, resembling an early Christmas present. Across the spectrum, 'balanced' portfolios (60% equity / 40% fixed income) witnessed their most significant returns since November 2020.

Previous concerns about escalating borrowing costs to counter inflation were assuaged by weaker-than-expected inflation and softer US employment figures. This shift hinted at a potential peak in the Federal Funds rate, contrary to prior expectations of further increases.

The prevailing narrative of enduring elevated borrowing costs underwent a substantial revision in November. The substantial drop in inflation in the world's largest economy sparked discussions that borrowing costs might not stay high for as long as initially predicted. Speculation even emerged that policymakers could contemplate lowering interest rates by mid-2024.

These evolving forecasts provided a robust tailwind for risk assets, leading to commendable performance for equities and credit markets. Notably, the altered interest rate expectations led to substantial returns from fixed income, with US bond market returns reaching levels unseen since the mid-1980s.

Australia:

As anticipated, the Reserve Bank of Australia raised cash rates by 0.25% to 4.35% in early November, with indications that this could be the peak of the current interest rate cycle. Central bank officials, while sounding cautious, raised long-term inflation forecasts in their quarterly Statement of Monetary Policy, expressing concerns about potential inflation persistence in the first half of 2024. Inflation readings will play a pivotal role in local monetary policy, influencing sentiment toward Australian shares and bonds.

New Zealand:

Interest rates remained unchanged at 5.5%, with policymakers tempering market expectations for rate cuts in 2024. The Reserve Bank of New Zealand appears cautious about potential inflationary impacts from immigration and population growth, delaying immediate easing of policy settings.

U.S. Outlook:

U.S. interest rates held steady in November, but consensus forecasts now suggest potential cuts in the coming year, with up to five rate reductions priced in for 2024. Headline inflation slowed to an annual rate of 3.2%, a notable decline from the mid-2022 peak of over 9%, suggesting that significant interest rate hikes are achieving their intended effect of curbing inflation without jeopardizing economic growth. Job creation figures in October were modest, signalling potential economic weakening and a moderation in inflationary pressures.

Europe:

The President of the European Central Bank suggested the possibility of pausing the interest rate-hiking cycle. German business confidence improved, offering hope for economic recovery, although ongoing declines in industrial production indicate persistent challenges for manufacturers. In the UK, inflation dropped to a two-year low, aligning with Prime Minister Sunak's goal to halve inflation in 2023. Investors anticipate earlier interest rate cuts in the UK, according to consensus forecasts.

Asia/EM:

Amid sluggish economic conditions, China implemented economic support measures, injecting approximately A$300 billion into the financial system. In contrast to other major economies, China experienced falling prices, with the Consumer Price Index registering -0.2% year-on-year in October. Weakening producer prices suggest restrained consumer and business spending, potentially impacting Beijing's GDP growth targets.

Australian Dollar:

The 'risk-on' sentiment favored the Australian dollar, particularly against the U.S. dollar, appreciating nearly 3 cents. Broad-based weakness in the USD, rather than inherent AUD strength, drove this gain. The AUD also rose by 2.2% on a trade-weighted basis and 1.8% against the Japanese yen.

Australian Equities:

The Australian share market thrived in November, benefitting from moderating inflation data and positive company news during the AGM season. The S&P/ASX 200 Accumulation Index concluded the month with over a 5.0% gain. The Healthcare sector outshone others, posting a remarkable 11.7% return. Concerns about oversupply impacted energy stocks, with oil prices falling over 6%, leading to relative underperformance. Small caps outperformed, with the S&P/ASX Small Ordinaries closing 7.0% higher, offsetting earlier weaknesses in 2023.

Global Equities:

Share markets globally experienced strong rallies, with the S&P 500 Index gaining 9.1% in the U.S., marking the best monthly return since mid-2022. Favorable earnings announcements in the U.S. affirmed the resilience of profitability, particularly in technology-related sectors. European markets varied in returns, with Spanish equities rising over 11% and the UK's FTSE 100 Index up 1.8%. Economic indicators in China dampened the CSI 300 Index (-2.1%), while Japanese shares surged, with the Nikkei adding 8.5%. Emerging markets performed well, with the MSCI Emerging Markets Index rising 4.5% in AUD terms.

Listed Property:

Global property securities outperformed broader equity markets, with the FTSE EPRA/NAREIT Developed Index adding 9.0% in AUD terms. European markets, particularly in Sweden and Germany, saw the best performances, while Asian markets posted modest gains. U.S. REITs beat consensus expectations, contributing to positive returns from the world's largest property market. Locally, lower bond yields supported A-REITs, returning 11.0%.

Global and Australian Fixed Income:

Bond markets witnessed exceptionally strong returns in November as global yields fell sharply. The Bloomberg Global Aggregate Index returned 3.2% in AUD terms, with U.S. Treasuries delivering particularly robust performance. Lower-than-expected inflation readings contributed to the decline in yields, prompting suggestions that official cash rates may have peaked in key regions. Locally, 10-year Australian Commonwealth Government Bond yields fell 0.51%, leading to a 3.0% return for the Bloomberg AusBond Composite Index.

Global Credit:

Credit markets experienced a rally, with spreads on investment-grade and high-yield corporate bonds narrowing sharply. Lower interest rate expectations are seen as favorable for credit issuers. The likelihood of a 'soft-landing' in 2024 increased, aligning with subdued inflation and resilient economic growth. U.S. names performed well, with positive sentiment also extending to European and Asian property names.

In summary, November showcased positive trends across global markets, driven by evolving interest rate expectations, moderating inflation, and strong corporate performance. These factors contributed to substantial gains in equities, fixed income, and credit markets.