Equity market anxieties

11 October 2018

Global and local equity markets have declined significantly since the beginning of the month. The MSCI world index is down by 4.5% in US dollar terms. The tech-heavy Nasdaq Index is down 8% and the FAANGS Index (Facebook, Apple, Amazon, Netflix and Alphabet’s Google) has lost 10%. The Chinese equity market is down 9%, the MSCI Emerging Market Index is down 6% and the SA All Share Index is down 7%. Naspers is down 40% from its’ previous highs and has lost over 14% since the beginning of October.

Investor sentiment can best be described as anxious. The Volatility Index (VIX) has virtually doubled suggesting that investor complacency has significantly diminished.

The apparent trigger for this recent fallout was a rising US 10 year Treasury Yield (the world’s risk-free rate) which lifted from just above 3% at the beginning of the month to 3.25%, before declining to around 3.15% where it sits currently. With equity markets having been previously well-supported by a goldilocks environment, meaning robust earnings and relatively low interest rates, the prospect of the removal of one of those pillars of support, the low interest rates, has spooked the market.

The global economy remains ‘de-coupled’ meaning the US is looking very strong economically while the rest of the world is seeing some signs of deceleration. This has led to upward trending US interest rates, in response to potentially higher inflation, and a strong US dollar. It is by now well known that this has caused a shortage of US dollar liquidity outside of the US which, in particular, has been causing pains in the emerging market space, especially amongst those countries with high levels of US dollar debt.

Should we be worried?

There are a few reasons to be concerned, such as the tightening of US monetary conditions and the lack of US dollar liquidity as well as the slowdown of the Chinese economy and elevated oil prices.

However, there are also factors to consider before descending into panic. Core inflationary pressures are under control with rate hikes being slow and gentle. We do not anticipate that US long-bond yields will continue to go much higher. On top of these, earnings growth is still robust and so we are certainly not panicking.

While we have taken a conservative view on risk assets in our multi asset solutions we are not seeing much new evidence to change the global macro view which underpins our asset allocation.

In other words we would not be looking to reduce risk exposure in these panicky times.

From a South African local market perspective, economic conditions are very challenging. Bond yields have risen which has put equity market valuations under pressure. We regard yields as being very attractive in real terms when compared to inflation however, and would anticipate that a decline in these yields in due course will provide market relief.

The precipitous decline in the Naspers share price which was affected by a general global tech sell off and China regulatory concerns has been the main talking point, but our view is that this is offering increasing value.

It’s impossible to say where sentiment will take this market in the very short term but we think investors should stay the course.