Inflation fell in the US and the UK, but against a backdrop of pessimistic growth forecasts, declining living standards and rising energy costs, the Bank of England is holding firm on monetary policy. In the face of rising gas and electricity prices, the energy price cap will go up in January.
November 2023 market commentary
After months of economic and geopolitical uncertainty, global equity markets had something to cheer at the end of November with all major indices posting gains. The S&P 500 ended the month up 9.13%, the Euro STOXX 50 gained 8.08%, and Asian markets rebounded after three consecutive months of losses. The FTSE 100 also closed up 2.29% despite warnings from the Office for Budget Responsibility (OBR) that a slowing UK economy would limit the growth forecast for the next two years. The technology sector was a key driver in November’s global upturn, though growth stocks generally outperformed their value counterparts. Commodity prices also descended from their October peaks, oil in particular falling due to increased supplies in the US and lower-than-expected voluntary output cuts from OPEC+ producers.
(All returns are sourced from FactSet and are reported as total return in local currency for the period 01/11/2023 – 30/11/2023).
November markets overview
Headline and core inflation in the US dropped back to 3.2% and 4% respectively, driven largely by falling energy and petrol prices. While markets believe that the monetary tightening cycle is finished, the Federal Reserve appears determined to hold higher rates for longer with their 2% inflation target in sight. As such, the Fed left its base rate unchanged.
Real disposable incomes are expected to be 3.5% lower through 2024-25 than they were pre-Covid… the OBR said it represents the largest reduction in real living standards since records began.
While UK headline inflation saw a bigger-than-expected fall to 4.6%, the Bank of England held firm on monetary policy against a backdrop of pessimistic growth forecasts, declining living standards and rising energy costs. The OBR’s downward adjustment of the growth forecast indicated that UK living standards wouldn’t return to pre-pandemic levels until at least 2027. Real disposable incomes are expected to be 3.5% lower through 2024-25 than they were pre-Covid – while the drop isn’t as steep as previously forecast, the OBR said it represents the largest reduction in real living standards since records began.
Having dropped its energy price cap to £1,834 in October, Ofgem announced that due to rising wholesale gas and electricity prices, the cap would increase in January to £1,928. Despite the increased short-term cost to consumers, the cap is still expected to reduce during the first half of 2024.
The eurozone saw headline inflation fall to 2.4%, while reduced goods and services costs also helped to ease core inflation. Though the central bank is expected to hold its record 4% base rate in December, there is growing speculation that a cut will come in the first half of 2024.
FCA’s sustainability disclosure and labelling regime looks to boost UK’s leadership in sustainable investment
Research has shown that a majority of investors are concerned about the validity of some sustainable investment claims and the use and meaning of inconsistent investment terminology in reporting and marketing.
After detailed engagement with the investment industry, consumer groups and other regulators, the Financial Conduct Authority (FCA) has confirmed a substantial package of measures to improve the transparency of sustainable investment and enhance consumer trust. The new Sustainability Disclosure Requirements (SDR) directive aims to introduce a labelling regime to enable investors to easily assess the merits of sustainable investment products with clear sustainability goals and criteria. The directive will also introduce an anti-greenwashing rule applicable to all FCA-authorised firms, and naming and marketing rules for investment products to encourage the accurate use of investment terminology.
Implementation of the SDR directive will be phased between May and December 2024, with ongoing consultations into some aspects of the policy and its application to different segments of the investment industry.
US and China agree to revive bilateral climate working group
Ahead of COP28, US and Chinese climate envoys, John Kerry and Xie Zhenhua, met in California to re-launch a cooperative climate working group suspended after former House speaker Nancy Pelosi’s controversial 2022 trip to Taiwan. The group’s purpose is to “engage in dialogue and cooperation to accept concrete climate actions” in this decade, according to an accompanying statement.
Key areas of discussion included the joint reduction of methane emissions (the first time China has included them in their 2035 climate goals), increased energy efficiencies, and the wider adoption of circular business models. Both sides also agreed to share information on emissions-reducing policies and technologies and pledged to tackle plastic pollution and forestry loss.
Additionally, the US and China have committed to “sufficiently accelerate renewable energy deployment” in their economies and triple global renewable energy capacity by 2030. The phasing out of fossil fuels, however, remains a contentious issue – the Chinese government has focused more on domestic energy security since nationwide power cuts affected industrial output in 2021 and still maintains that a complete break from fossil fuels is “unrealistic”.
Both sides also agreed to share information on emissions-reducing policies and technologies and pledged to tackle plastic pollution and forestry loss.
AI summit leads to joint declaration for responsible development and use
The UK pulled off something of a diplomatic coup in convening world leaders and tech giants at a summit at Bletchley Park to discuss the risks associated with the global development and use of artificial intelligence.
Two days of talks culminated in the drafting of the so-called ‘Bletchley Declaration’, a policy directive signed so far by 29 governments and organisations including the UK, US, China, and the European Union. The Declaration aims to identify shared concerns regarding frontier AI, build an inclusive scientific and evidence-based understanding of current and potential future risks, and develop international risk-based policies to ensure safe adoption of AI while respecting differing national frameworks on technological use and regulation. Above all, the Declaration pledges to “cooperate on AI to promote inclusive economic growth, sustainable development and innovation, to protect human rights and fundamental freedoms, and to foster public trust and confidence in AI systems to fully realise their potential”.
Following on from the Declaration, the UN confirmed its support for an expert AI panel equivalent to the Intergovernmental Panel on Climate Change, and major tech developers agreed to collaborate with governments during pre- and post-release AI model testing.
While the Declaration represents a breakthrough in the wider recognition of AI risk, international policymakers are split on the scope and scale of regulation. In the EU, member states have been negotiating the final form of the forthcoming EU AI Act which could be agreed by the year’s end. China has already implemented regulation to “promote the healthy development and standardised application of generative AI”, and the US government recently issued an executive order advocating responsible innovation. In contrast, the UK has taken a pro-innovation stance and held back on regulating the domestic AI sector for now, warning that premature regulation could stifle industry growth.
If you would like to find out more about AI, you can watch the recording of our recent Green Shoots webinar on the topic of: ‘AI, human rights and investment’
Green Shoots is Greenbank’s lunchtime webinar series where we are joined by specialist guest speakers to explore a sustainable investment topic.