Global Market Review - October 2018
October was a brutal month. Global equity markets saw a ~2 standard deviation move, leaving the global index down –3.8% YTD (before dividends) and down 10.1% from the highs in January. S&P 500 total returns fell by –6.8% while EM equities fell by –8.7% on the month.
Stocks around the world have lost more than $5 trillion in value in October according to Dow Jones Indices, the biggest contraction of capital markets since the 2008 financial crisis. Signs of slowing corporate growth among previously high-flying tech companies such as Amazon, Alphabet and Facebook extended losses across the globe. The Nikkei had its biggest monthly pullback since 2010.
Declines in bond prices have exacerbated investor’s pain. The JP Morgan Global Aggregate index is down –3.5% for the year while corporate bonds, using the iShares IBOXX ETF as a proxy, have lost –7.7%. The most broad bond market benchmark, the Bloomberg Barclays Multiverse, has lost $1.34 trillion of market capitalization so far in 2018. This has been one of the worst years for diversification in recent memory.
As quantitative easing turns into quantitative tightening, it may be naïve to believe that this slowing of liquidity will have no effect on the global markets. If, as it has been argued, QE suppressed volatility and inflated asset values, then its removal should logically be expected to have the opposite effect.
On a fundamental and relative-value basis we maintain a neutral weighting in Equities but our conviction is ebbing. Indeed, we have surrendered our equity weights to our risk management rules, allowing positions to be culled purely based on negative momentum and sentiment. We believe that in the current environment, investors needs to focus on downside-risk protection and manager alpha as there seems to be very few obvious beta or market driven calls to be made.