Monthly Investment Briefing: A calm budget in a volatile month

A Calm Budget in a volatile month…

October was a month of two halves for markets as much as it was for the weather. Oil climbed back above $110 per barrel as the US-Iran conflict entered its ninth month, pushing inflation higher on both sides of the pond and taking gilt yields to their highest levels since 2007. Equities saw a sharp rotation, with investors moving out of AI-related technology and into energy and more defensive sectors; a shift that favoured the UK market. The month closed with a cautious UK Budget that markets broadly welcomed…

The UK Budget: A Steady Hand on a Thin Margin…

Chancellor John Healey’s first Budget on 28^th October kept the fiscal rules and the pledge not to raise headline income tax rates which gilts took in their stride. Here are some of the key headlines:

• Headroom Cut: Headroom against the stability rule will fall to £15 billion for 2029-30 from £23.6 billion in March, a notable slimming of the cushion against further shocks. Higher interest rates add around £14 billion to debt interest this year.
• Weaker Outlook: The OBR cut 2027 growth to around 1% and does not expect inflation to return to target until 2028.
• Winter Energy Support: Around £4 billion of measures, including removing gas standing charges, a fuel duty freeze and a £100 rebate for households in lower council tax bands.
• How It Is Paid For: A temporary rise in the bank surcharge to 6%, higher gambling duties, less generous writing-down allowances, and a further two-point rise in tax on savings and property income from April 2027.
• Savers: The cut to the cash ISA allowance was reversed and a new First Time Buyer ISA introduced.
• Market Reaction: The 10-year gilt yield eased to around 5.3% while sterling saw a muted response. With most hard decisions deferred, further tax rises in 2027 remain likely.

Over the course of October we gardened portfolios once again, taking timely profits from several existing holdings including CrowdStrike, ServiceNow, Intuitive Surgical, and Sony prior to the tech earnings volatility.

Oil, Inflation and a Change of Leadership…

• Iran and Oil: Brent rose more than 13% over the month, reaching $116.72 on 23^rd October, its highest since April. Prices briefly eased, but further tanker attacks in the Strait of Hormuz saw Brent close the month around $113.
• Inflation Picks Up: US CPI inflation rose to 3.7% in September, with the Fed’s preferred PCE measure at 3.6%, while UK CPI rose to 3.5%, driven largely by fuel. Eurozone inflation reached 3.8%.
• Central Banks Lean Hawkish: The Fed held at 3.75% to 4.00%, with two members voting to hike. The ECB held at 2.5% as Christine Lagarde announced her early departure. Markets expect a Bank of England hike on 5^th November.
• Gilts Peak, Then Steady: The 10-year gilt yield touched 5.51% on 8^th October, its highest since 2007, and the 30-year passed 6% before both eased.
• Rotation from AI: Energy and consumer staples rose sharply while technology fell, leaving the Nasdaq with a notable monthly loss of 5.3%. Supported by energy heavyweights, the FTSE 100 rose by more than 1% in October, its first monthly gain in three months.

Portfolio Positioning…

Over the course of October we gardened portfolios once again, taking timely profits from several existing holdings including CrowdStrike, ServiceNow, Intuitive Surgical, and Sony prior to the tech earnings volatility. We also took profits from our long-term position in Shell. The proceeds were used to top up existing positions: Sanofi and two of our investment trusts, International Public Partnerships and BlackRock World Mining Trust.

We continued to monitor the three high-conviction ideas highlighted in last month’s note and towards the end of the month, added Rolls-Royce to give us additional exposure to our Divided World and Energy Transition themes. As we move into November, portfolios remain broadly in line with our Strategic Asset Allocation, and our attention now turns to areas outside the equity allocation. With markets broadening beyond AI, we believe the backdrop is a healthier one for diversified portfolios.

Outlook…

November opens with a busy calendar. The US midterm elections on 3^rd November are followed by the Bank of England’s decision on 5^th November, where a rate rise is widely expected after September’s inflation surprise. Markets are pricing a likely Fed rate rise in December, while the ECB faces a leadership transition. Oil remains the key swing factor for inflation, and therefore for interest rates and bond yields.

The Budget has bought the UK some stability for now, but by deferring the harder decisions it sets up a more demanding fiscal event in 2027. Seasonally, the final two months of the year have historically been supportive for equities, though we expect volatility to persist.