Economic Turmoil Hits Equity Markets as Data Disappoints
It has long been said that when America sneezes, the world catches a cold, but what happens if America sneezes while the rest of the world already has a cold? As a global leader, other nations tend to follow America, for the good or bad, therefore this week’s data releases are likely to cause problems for equity markets in the coming months, as weak US Manufacturing and Services data induces a sell off in risk assets. As the global economy continues to show signs of weakness as the data deteriorates, this week’s ISM releases revealed a faltering US economy amid slowing global growth, trade uncertainty and looming political event risk.
For more information on the US economic data which is moving markets this week, please see the attached Market Update document.
As equities declined and bond yields fell over the week, the portfolios performed well, recovering losses from the temporary bond sell off last month. As the week went on, downside risks increased as European data disappointed across the board, while the US Impeachment drama continued, and the WTO gave approval for US duties to be placed on $7.5 billion in European goods, inflicting further pain on a struggling Eurozone economy. At the same time, Brexit uncertainty continued as Boris Johnson outlined his new Brexit proposals in Parliament, prompting backlash from the Republic of Ireland and the EU over the backstop ‘compromise’.
While markets are likely to remain volatile in the near term as earnings season begins and weakness continues to feed through into the markets amid looming political risk, it is clear that risks remain firmly tilted towards the downside, stoking recessionary concerns. Against this backdrop, our portfolios remain defensively positioned, benefitting from a decline in equity markets and shifting risk-off sentiment.
Key events this week:
- Friday: US September Jobs data
For anyone who wants further data to substantiate the position please review the attached Global Economic News Document attached and the economic data set also attached.
Model Portfolios & Indices
Over the week, most global equity markets declined amid rising downside risks in the global economy. Markets remained highly volatile over the week as recessionary concerns remain, with investors struggling to find further support as geopolitical risks remained high and the data continues to disappoint.
Safe haven assets such as gold gained over the week alongside bonds, indicating that the risk-on sentiment observed earlier this month was temporary as expected, with bond yields beginning to decline again over the week. Equity markets declined over the week, with risk off sentiment spreading as equity investors grapple with recessionary fears and uncertainty over trade policy. It is clear that geopolitical tensions remain, and the economic data continues to illustrate weakness in the global economy, with risks now firmly tilted towards the downside. The OBI portfolios remain defensively positioned with limited equity exposure and a downward tilt which seeks to benefit when equities decline, and our portfolios remain well positioned given current conditions. The portfolios gained over the week as the bond exposure performed strongly while the inverse equity exposure gained.
As we progress from here, it is important to recognise that we should not let benchmark performance make us feel like we have missed out on anything, because although we have in the short term, recent performance shows how quickly this can be reversed given current levels of risk and uncertainty.
Overall, it is our view that equity markets will continue to decline before adjusting to the new norm based on lower global growth and weaker corporate profitability. The key point here is to take a long-term view, look at the current level of uncertainty in the global economy, and remember that the portfolio is designed to minimise your exposure to risk and preserve capital. Markets are behaving irrationally, therefore the most sensible strategy is a defensive one given current market conditions.
Important Information
The data above will not directly correlate to the indices as there is always a delay in pricing because the US markets close significantly later than the European markets and the Asian markets. The data set above reflects the last close and much of the days movements will not yet be reflected in the portfolios due to pricing delays. You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in price or value and you may get back less than the amount originally invested.
Past performance is not a guarantee of future performance. Performance figures quoted include the fund manager charges but exclude other fees such as adviser, custodian, switch and/or discretionary investment management fees. Unless otherwise instructed and accrued, income is reinvested into the portfolio.
This Day in History
On this day in 2014, the cast and crew of the BBC’s Top Gear had to abandon their vehicles and flee Argentina after they were pelted with stones. A crowd was incensed that one of their vehicles had a number plate (H982 FKL) that appeared to refer to the Falklands conflict of 1982.
Have a great week,
Jason & Gina
