Market Views: What next after the global equity rout?
Volatility – more of it – has been a major theme for stock markets in 2018 after last year's benign conditions.
The last couple of months have only served to reinforce that, with some major market benchmarks shedding nearly 10% of their value. All told, the S&P 500, Nasdaq Composite, FTSE 100, Korean Kospi, Nikkei 225, and Chinese CSI 300 indices fell by an average of 8% from October 1 to December 3.
A pullback in high-flying technology stocks, continuing US-China trade tensions, weakening growth outlooks in Europe and China, and rising US interest rates – with the Fed Funds rate bumped up to a 2% to 2.25% range in September – were all cited as causal factors.
In response, fund managers globally have been piling up the cash. According to Reuters’ latest monthly poll of asset managers, cash levels have risen to a 20-month high of 5.6%.
We asked a pension fund chief investment officer, a discretionary wealth manager, a family office CIO and a fund manager how the recent sell-off in global markets has affected their portfolios, and how they see markets behaving going forward.
The following extracts have been edited for clarity and brevity.
Jang Dong-hun, chief investment officer
Public Officials Benefit Association (Poba)
That kind of market volatility, of course, affects our portfolio [but] we cannot just immediately change our position. Our tactical asset allocation has not been changed. However, Poba has been gradually decreasing its public equity exposure during the past two to three years, and we lowered our equity exposure at the beginning of this year, so we have lowered it quite substantially this year also.
We think our current public equity position is a level that we can handle ... Right now is not the optimal time to reduce public equities because ... current valuations reflect a very negative scenario for Korean equity and global financial markets, so I don't think it's cheap to reduce at this stage.
To secure the stability of our portfolio, this year we have increased fixed income-related investments gradually, including private debt funds. We have increased in infrastructure asset classes and we have increased overseas real estate debt investments. At current valuations dividend yields have become more attractive.
Too many people are so negative on global market prospects and, based on my experience, I don't think financial markets move based on unanimity ... This current market situation is kind of a natural adjustment period to eliminate excessive valuation levels ... As we reach a neutral rate level, inevitably volatility will increase. I don't mean to say that this market will recover immediately, but during the next couple of months it will test the possibility of a recovery.
Also ... this year had too many extraordinary factors in the US market especially: they enjoyed a tax deduction in addition to the strong economic recovery. After the tax reduction and the trade war effects fade away next year, I think definitely economic growth will be moderate.
I'm cautiously optimistic [for] next year ... [Since] the WTI crude oil price has [fallen sharply], inflationary pressures may not be strong enough for the Fed to raise interest rates any more, so next year we may see a Goldilocks scenario – not too cold and not too hot.
Tuan Huynh, head of discretionary portfolio management and chief investment officer for Asia Pacific
Deutsche Bank Wealth Management
We took the opportunity of the recent correction to add more risk on a tactical basis. We have increased equities during the equity correction in October and, more specifically, in the US and China ... We do see the market correction as a good opportunity because we think markets have maybe overpriced the risks, which of course are still there -- the trade tensions, Brexit, the Italian budget -- so hence we were thinking this is the right opportunity to ... enter the market.
When you look at the fixed income space, we are getting more positive ... With the recent equity correction you have also seen credit spreads widen quite substantially. The combination of rising yields and spread widening has lifted corporate bonds, both in the investment grade and the high-yield space, to a very attractive level, mainly also in Asia.
We do not expect now a straight-line, upward movement over the next few weeks or months. Obviously, markets will still be quite volatile, but we do see most of the negative news as most likely already priced in. When looking at more short-term triggers -- what could potentially be some of these triggers -- we have seen this week already a more dovish tone from the Fed. This has led to some market movement, especially in the US, [because] the Fed might not be as aggressive as previously expected, so hence there are some positives you can draw.
Stephen Pau, chief investment officer
Hefeng Family Office
It has been a volatile year, especially in September and October ... The market is worried about the US-China trade war, the Brexit decision, Italian budget issues and the US and Saudi relationship with regards to the direction of oil price. We accumulated a substantial amount of cash just before the fourth quarter as a tactical asset allocation for our model portfolio on a short-term basis as we foresaw that there would be some sort of jitters because of the above issues. Furthermore, we have also added some reverse-index instruments to protect our portfolios.
We do see opportunities arising in emerging markets and in Asian markets as the US Fed may only have three more interest rate hikes (including December 2018) to go before pausing. The interest rate differential against Europe will likely decrease, as [the European Central Bank] is likely to raise rates in the second half of next year.
We believe money will flow from developed markets to emerging markets as the US dollar weakens ... We expect emerging market equities to do better, especially because we have already seen some stabilisation in some of the emerging market currencies.
Having said that, we expect global markets are still going to be choppy and volatile over the next six to 12 months as the US economy approaches the late cycle of the bull market. In addition, the phenomenon of big US GDP growth that we have seen this year is unlikely to continue next year due to further lack of stimulus or tax cuts.
Wenting Shen, solutions strategist in the multi-asset division
T. Rowe Price
Valuations have come down from elevated levels due to recent market corrections, so instead of reducing risk exposures, we have taken advantage of the opportunity to reduce our underweight in equities from sidelined cash and to add to select overweight positions.
While the first half of the year was marked by the disproportionate contribution to growth from the US, we see greater upside potential in equities outside the US as a result of their attractive valuations and room for margin expansion. In particular, we have increased our overweight positions to emerging market equities where we see attractive valuations supported by cheaper currencies.
Increased market volatilities have also sparked more interest from investors on our management volatility overlay strategy, which is designed to help mitigate downside risks and stabilise the volatility of the portfolio.
We do not see an imminent recession over the next six to 12 months given the still strong fundamentals, but we are cognisant of the potential downside risks such as from the trade tariffs and peaking liquidity and earnings growth. While no one knows where the bottom is, over the last several years and throughout history, risk assets have consistently bounced back after sell-offs. As such, we will continue to be defensively positioned while looking for entry points to get back in.