30 Oct 2018
Risk has returned to markets with investors exhibiting risk-off behaviour, mainly driven by the recent rapid rise in US bond yields, strong profit taking in those stocks that had rallied the hardest more recently, and escalating fears related to trade war concerns.
Corrections like these, whilst never ideal, are generally healthy for future returns as they clear out those investors trading on momentum with little regard for market fundamentals and valuations, which are clearly the focus of longer term investors.
Fundamentals in equity markets and underlying economic conditions globally remain healthy, but not as good as they did at the beginning of the year given the impact of trade wars, US rate rises, high oil prices, and spot fires in select emerging market countries such as Argentina and Turkey.
Looking at the actual data, the Australian equity market is down over 7% in the month of October thus far, whilst the US equity market is down over 6% and the technology-dominated NASDAQ is down nearly 9% month to date. In the other parts of the growth spectrum, Australian listed property is down around 3%, global listed property is down under 2%, and global listed infrastructure is down just over 2%. In contrast, Aussie bonds are up just under 1% month to date whilst global bonds are incredibly flat for the month even in light of the strongly rising US bond yields we saw earlier in the month.
Key from this is that diversification still works.
The other key take out is that timing the market in the very short term remains a mug’s game. If we look at the 12 months return to today, Australian equities are up over 1%, US equities are up 14%, whilst the technology-heavy NASDAQ is up circa 20%. In the same period, Australian bonds are up near 4% whilst global bonds are up near 1%.
From here, we expect a continuation of these types of episodic corrections, where a culmination of fears / concerns breaks the camel’s back rather than any one major event. At the same time, we expect volatility to trend higher going forward. However, when we look at valuations across most growth assets right now, we don’t see any need to panic.
- Chris Lioutas
Chief Investment Officer
To find out more and have the opportunity to discuss further on the current market conditions, PSK Financial Services invite you to our Market and Economic Briefing seminar on Tuesday, 13th November with PSK's CIO, Chris Lioutas. If you would like to attend the seminar, please register HERE.