As we head into the closing stages of 2018, commentators are re-working their year-in-review pieces which were probably going to focus on continued low volatility, and tech-led US stock market divergence from the rest of the world. Instead, the fourth quarter has seen an upsurge in volatility, a crack in the infallibility of the FANG stocks, and equity markets in the US back to around zero return territory for the year. Oil has also sold off significantly, down around 30% from its four-year high in early October, and credit markets like US high yield are under pressure. While we aren’t yet running to the exits, and have been positioned well for the significant change in conditions, we have taken a slightly more cautious stance by moving to a neutral position in fixed income, and maintain our relatively defensive exposure to equity markets.
For many of our team based in London, Brexit is clearly front-of-mind, and the tail risk of an acrimonious ‘no-deal’ divorce could be wide. But contagion from Brexit is far from Europe’s only worry. Perhaps more concerning is the performance of Germany, with the region’s economic powerhouse posting its worst period of quarterly output since 2013. With uncertainty in Italy continuing, and the ECB still signalling the path to normalising interest rates, the outlook is not positive in the near term, and has led us to an underweight position in the region.
As we move into 2019, the range of potential outcomes, both positive and negative, is phenomenally wide. Will the Fed slow the pace of its tightening path, as the market interpreted from Powell’s most recent speech? Or will the G20 summit produce a détente in the US/China trade war? Both these potential outcomes could lead to a resurgence of risk-on sentiment, at least in the near-term. Investors looking to recoup their losses may also come into play to fuel a risk-on trade, and we will be closely watching technical indicators for this eventuality.
In this highly uncertain environment, we will continue leveraging the wide range of instruments and asset classes at our disposal to both protect capital, and find the sources of alpha that will undoubtedly come with increased volatility.
Chief Investment Officer - Multi Asset