OPEC came up with the goods at the last minute. This year has been the year of the unexpected, OPEC agreeing to production cuts added to the list. OPEC’s credibility had been called into question as they had failed in previous meetings to get an agreement, expectations on the day were for similar result. We pointed out ahead of the meeting that fund managers had been underweight banks and metal stocks earlier this year, and were taken by surprise when sentiment changed in these sectors. If fund manager surveys ahead of the meeting were correct, this OPEC cut will also have taken them by surprise. The rotation from defensive names continued on Thursday as the so-called bond proxy sectors, for instance tobacco, are being sold to fund investors looking to re balance into the value sectors.
Heading into the last month of the year the MSCI World index is up 3.5% year to date, based in US dollars. Once again, the divergence of performance between the US equity markets and the European ones are notable. In their local currencies, the S&P 500 has risen 7.5% year to date, however the MSCI Europe index fallen almost 6%. So, called experts were positioned this year for exactly the opposite move, another example that being part of consensus may help you sleep but does not guarantee to make you profitable. Sterling investors would have seen almost the same return from gilts as from equities this year, both having returned circa 8%.
The pound has recovered some of its lost ground, particularly against the euro in the past month. As much as concerns grow for Europe ahead of Sunday’s Italian referendum, as a renewed confidence in the pound.
It appears no outcome can be correctly forecast this year, the surprise would now be should Renzi win on Sunday the vote to push through his reforms of the political system, that seems unlikely. The Italian stock market rose 2% in November, despite the nerves ahead of Sunday. Italy’s economy is not doing well, unemployment in the country remains above 11%. Sunday’s vote is another chance for the masses to vote against the establishment, as they have seen no benefit from the closer integration of Europe and the euro. In fact, the opposite.
Once the result of Sunday’s vote is known, attention will turn to France and the upcoming Presidential elections next spring. Should the conflagration of populism continue in France, this will add further pressure to the European Union. Brexit may soon be the least of Angela Merkel’s concerns.