Global equities perspectives - Q3 2018
- US-led strength in Q3 gives way to volatility in October
- Low risk factors stronger in Q3, signifcant reversals in October
- Earnings matter, even if they haven’t lately
- The premium paid for growth continues to grow
Economic and market comments
Global equity markets were up over the third quarter of 2018, with the developed market MSCI World Index returning 5.1% in USD terms. However, this was driven mainly by the strong showing from the US market, as it continued its divergence from other regions; several major US indices reached record highs in the period against a continuing backdrop of robust corporate earnings. European stocks did manage to post modest gains for the quarter despite the Turkish currency crisis and Italian budgetary concerns. Turkey’s troubles, however, along with lingering trade tensions and a strengthening US dollar, proved to be too much of a headwind for emerging market equities, as the MSCI Emerging Markets Index fell 0.9% in USD terms.
In an anticipated move the US Federal Reserve (Fed) raised its target range for interest rates to 2-2.25% as the domestic economy continued to perform well, while China announced plans for a fiscal stimulus program to combat investors’ fears over a weakened renminbi and souring relations with the Trump administration. Sector-wise, as shown below in Exhibit 1, investors looked to more defensive areas over the quarter, as health care (+11.6%) and telecoms (+5.8%) were among those to lead the market higher. Technology (+8.2%) and industrials (+6.2%) also outperformed the broader market while all other sectors lagged behind, with both materials (-0.4%) and real estate (-0.9%) posting negative returns.
Given the timing of this note, it would be remiss not to mention the global equity market sell-off that followed the close of the quarter. Early October brought heavy losses to several US indices, as rising bond yields and interest rates (the benchmark 10-year US Treasury note hit 3.2%, the highest for seven years) sparked a wave of profit-taking. The sell-off then spread to Europe and Asia, where technology and tariff-sensitive exporting stocks were among the most sold.
This bout of market turbulence resulted in a meaningful rotation in some long- established sector and factor trends. In particular, as noted in the factor section below, we have seen a reversal in the performance of Growth styles relative to Value styles in October to date.
While we would refrain from drawing any conclusions from short-term market moves, volatility such as that experienced in early October is a timely reminder for investors to avoid complacency and that all investment cycles, be they ‘value-growth cycles’, ‘bull-bear cycles’ or ‘earnings cycles’, are called ‘cycles’ for a reason!
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