Willing to take risks: Investors are still seeking risk and the bull market could attract further passive flows and a late-cycle buying spree. Picture: 123RF/BACHO12345
Willing to take risks: Investors are still seeking risk and the bull market could attract further passive flows and a late-cycle buying spree. Picture: 123RF/BACHO12345

A September that shocked global investors was followed by an even worse October, with the MSCI All Country World Index recording a loss of 9.3% (in dollars) to October 26, its worst performance since the peak of the eurozone crisis in 2012. The index is down 5.8% on a year-to-date basis, while the FTSE/JSE SWIX Index is down 12.6% in September and October (in rand), and 15.8% on a year-to-date basis.

Before making any decisions, it is important to understand the key factors behind the sell-off.

Global growth concerns: 2018 started with a lot of optimism about “synchronised global growth”. This optimism has now evaporated. The IMF has cut its global growth forecasts for 2018 and 2019 by 0.2% to 3.7%. However, markets are signalling that the expectations of the slowdown are more severe.

We do not know how long the bear market will last, but we do know that a bull market will follow

The Citigroup Global Economic Surprise Index, which measures how often data comes in better or worse than expected, has been in negative territory since April, its longest negative stretch in four years.

Slowdown in China: The Chinese economy has been slowing since 2014, as the government tries to engineer a soft landing after a long, construction-driven, debt-fuelled period of growth. However, that may not be possible. The third-quarter GDP growth rate came in at 6.5%, below expectations and marking the slowest reading since 2009.

Together with the impact of the US trade tariffs, an equity market that is down more than 20% in 2018 and China’s currency, the renminbi, depreciating more than 10% relative to the US dollar, sentiment is weak.

Turmoil in Italy: The populist coalition governing the eurozone’s third-largest economy is challenging the powers of the EU by refusing to comply with budgetary limits imposed on all members in order to fund social spending.

Italy is the eurozone’s most indebted member. As credit-rating agencies rattle their sabres, Italian bond prices have been falling, posing a threat to Italy’s banks, which are one of the biggest holders of Italy’s sovereign debt. Analysts estimate that a 4% yield on the 10-year bond is a threshold level above which Italy’s debt will become unsustainable from a fiscal perspective. It is currently trading at about 3.6%.

This comes at a time when Poland and Hungary are already straining the cords that bind the EU together.

Brexit: Despite many headlines, political speeches and promises, there is no sign of a deal in Britain’s negotiations to exit the EU. This is adding to the uncertainty. At this late stage, the UK will either crash out of the EU with no deal, or a transition period will be renegotiated until the next general elections

Rising oil prices: The implosion of Venezuela and the withdrawal of the US from the nuclear treaty with Iran have seen the oil price rise sharply to more than $80 a barrel, bringing with it a sharper acceleration in global inflation.

US corporate earnings: US corporate earnings for the third quarter have been disappointing despite a healthy economy. Cracks are starting to appear on the back of rising wage costs, interest bills and materials prices. Moreover, the impact of the 2018 tax cuts will make this year’s results hard to beat in 2019. The narrative of the US equity market having reached its peak is growing louder.

This concern is further fed by the third-quarter results of 3M and Caterpillar, two US industrial bellwethers, as well as technology companies, led by Amazon. All have cut their earnings forecasts for 2019.

Trade wars: Though the US has reached a new trade deal with Mexico and Canada to replace the North American Free Trade Agreement (Nafta), it remains at loggerheads with China, slapping $250bn of tariffs on Chinese goods and demanding sweeping changes to China’s economic policies.

If there is no progress in negotiations, the US is expected to introduce a further $200bn worth of tariffs, effectively sanctioning all Chinese imports. This will impact both economies, and a secondary impact would be felt by many European companies.

Rising interest rates: Investors remain concerned about the impact of rising interest rates on both fixed-income and equity markets. The US Federal Reserve is expected to lift rates in December for the fourth time this year and is slowly shrinking its balance sheet.

The European Central Bank plans to end its own bond-buying by the end of 2018, and even the Bank of Japan is cutting back on quantitative easing. The new era of “quantitative tightening” does not bode well for markets in 2019.

Geopolitical risks: In addition to economic developments, there are myriad geopolitical developments at play involving Saudi Arabia, Turkey, Venezuela, Brazil, Poland, Hungary and several other countries.

The US faces midterm elections on Tuesday, which may affect the dynamics. Most polls indicate that the Democrats will gain control of the House of Representatives, while the Republicans will retain a slim majority in the Senate; this would imperil Republican spending plans. On the other hand, a Republican victory in both houses could lead to another deficit-busting tax cut.

Italy is cosying up to Russia despite EU sanctions on Russia over its 2014 annexation of Crimea.

How should I react?

The first thing to acknowledge is that we are coming out of a period of extraordinary growth. Since January 1 2009 the FTSE/JSE SWIX Index is up a cumulative 224% and the MSCI World Index has delivered 292% (in rand terms) over this period. This is something to celebrate.

The only catch is that it is history, and one thing history has taught us about markets is that bull markets do not last forever. Every bull market is followed by a bear market, a period of losses during which the market falls by more than 20%. We are in that territory now.

Does that mean you should sell everything right now? No. No-one can time the market, nor the recovery. Selling low means you are likely to miss out on the recovery. History has also taught us some valuable lessons about how to survive a bear market.

Don’t panic: A bear market invariably causes strong emotional reactions of panic and fear, which is natural, but the best response to such a period of uncertainty is to do nothing. We do not know how long the bear market will last, but we do know that a bull market will follow.

Remember your investment timelines: If you are saving for retirement but do not plan to retire in the next decade, there is no point in worrying about short-term volatility. Whatever happens now will have little impact on your final investment outcome. The long-term trend line for all markets since records began has been up.

Bear markets have historically been shorter than bull markets: From the 1930s, bear markets have lasted an average of only 18 months. The average time it has taken for an equity portfolio to both endure a bear market and fully recover its value has been just over three years.

Don’t try to time the market: Everyone knows the goal of investing is to buy low and sell high. Hence there is a temptation to sell now and, after the inevitable downturn, buy everything back. Unfortunately, research shows that trying to time the market more often than not leads to worse returns. A consistent investment strategy typically beats everything else.

Find an asset management firm you trust: If you are using an asset management firm you trust to manage your money, they will already be making conservative investment decisions on your behalf, and they will do so without the emotions associated with managing your own money.

The only issue to focus on is fees. Over time, high management fees erode more value than any short-term market fluctuations.

The best advice one can offer is to do absolutely nothing. If you are invested in an appropriate long-term strategy, whether it is a conservative one or a growth-oriented one, stay the course.

  • Anderson is head of investments at Sygnia Asset Management. Views expressed are his own.

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