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Investor anxiety over global downturn intensifies

Dan Kemp  |  01 Nov 2018Text size  Decrease  Increase  |  
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Markets Have Experienced Significant Dispersion

Investment returns continue to be influenced by a handful of decorated themes. Perhaps most prominently, we have seen the execution of trade tariffs and concerns over weakening Chinese growth, which continued to dent sentiment towards most emerging-markets assets.

This has been exacerbated by further US dollar strength, US and UK central bank tightening and idiosyncratic woes in Turkey, Argentina and Venezuela.

Elsewhere, relative weakness continued in Europe, especially in the UK where a lack of progress surrounding the Brexit Chequers blueprint led UK assets to come under pressure. It really feels like two steps forward, two steps backward as investors seemingly ignore corporate fundamentals and await some certainty.

Even on the European continent, Italian and Greek risks have resurfaced, not to mention the flow-on implications from the Turkish banking crisis.

Yet, it isn't all bad news. Offsetting some of the weakness, Russia and Mexico had a third quarter to remember, enjoying the oil price rally and the relative political calm as investor interest returned. At a sector level, healthcare took top spot in the third quarter and notched a double-digit result.

A key takeaway from the third quarter was despondency for the vulnerable and cheer for assets that resemble a growth story. Speaking of market darlings, even Federal Reserve chairman Jerome Powell called the US economy "extraordinary" — such was the optimism being priced into the US market.

This has an obvious knock-on effect to fixed income assets, especially given a third interest rate hike in the US this year and the eighth since coming off the low of 0.25 per cent in late 2015.

Despite the above, fixed-income markets continued to be muted, with corporate debt performing slightly better than government equivalents over the third quarter. Inflation-linked bonds also performed reasonably as investors grappled with ever-undulating inflation expectations.

In addition, currency markets continue to move quickly, although a late retreat for the US dollar in September unwound some of the pain for emerging-markets assets. Sterling has continued its rollercoaster, too, although the overall move over the third quarter was neither here nor there.

Taken together, we find an interesting landscape, where investor anxiety of a global downturn may be starting to outweigh the FOMO effect – fear of missing out – stemming from the late-cycle rally. The net outcome, for now at least, appears to be that investors continue to support assets with less perceived risk and shun assets that are seemingly vulnerable — even if valuations hint that this is the dangerous thing to do.

Our view of the above is that we must stay true to our approach. We live in interesting times indeed, so fundamental diversification is required as we seek to invest when and where it makes sense to do so.

 

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Dan Kemp is Chief Investment Officer, Morningstar Investment Management EMEA

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is chief investment officer, Morningstar Investment Management EMEA.

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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