Market Commentary - October 2019
14th October 2019
Monetary policy and politics remained at the forefront of investors’ minds during the third quarter. In July and September, the US Federal Reserve cut interest rates, a marked change from its strategy of this time last year, as it started to fight the world’s problems rather than just its own. Moves were also made by central banks in Europe, China and other countries to ease monetary conditions in their respective economies, reflecting a backdrop of deteriorating economic momentum, particularly across the manufacturing sector.
Meanwhile, Donald Trump continued with his protectionist agenda, but notably his latest round of tariffs had a less meaningful impact on markets, suggesting investors are becoming less sensitive to the global trade war narrative. Brexit dominated headlines in the UK and the pound strengthened on the expectation that a no deal scenario could be avoided.
Despite these challenges, broadly positive company updates and continued support from share buybacks and corporate activity resulted in world equities returning 1.7% during the quarter. In addition to positive returns from equities, bond markets rose as they too benefited from the downward path of interest rates globally, taking the level of debt trading with negative yields to over US$ 17 trillion.
Interestingly in September, which itself was a positive month for world equities, the MSCI World Index was up 2.4%, its returns were driven by the financial and energy sectors, which traditionally sit in the value bucket of investing. The underperformance of value companies – those companies which trade below their intrinsic value – relative to growth companies has been the story of this cycle, so why did last month see a reversal of that trend, and will it continue?
The post Global Financial Crisis cycle has been the longest but slowest cycle in recent history. In a lower growth environment, those companies which can buck the trend and grow faster than GDP have been rewarded by the market. Conversely, those companies, like financials and energy stocks, that rely on GDP growth to boost sales have underperformed. The jaws between those growing and those not has stretched to such a margin that perhaps the only way left is for the gap to close, hence September’s strength in cyclical companies.
The question remains whether we are in a mid-cycle adjustment, where global economic growth is set to re-accelerate, or are we entering a period where global growth is set to take a material step-down. If it is the former, value investing will do well. If it is the latter, funds which invest in companies that have reliable and robust earnings will outperform. Central banks are doing all they can to prolong the cycle. For us, it is as important as ever to digest as much information as possible to continue to position client's assets in the right direction.