Investment markets continue to be dominated by the growth in US stocks. The US buoyancy, which seems to be almost defying gravity, has seen both equities and the US dollar rise further. Therefore, a glance at the broad international indices could be misleading. Despite historic highs for the global benchmarks, we continue to witness significant dispersion underneath. This includes a painful period for many key markets.
For example, UK, European and Asian markets have not fared well. The UK fell 2.8% during August, meaning year-to-date performance is practically flat. This was coupled by losses in Germany, down 3.5%, France, down 2.3%, Italy falling 9%, and China, down 3.9%. Japan returned 1%.
In fact, emerging markets have been punished generally, almost regardless of local narratives. The risk-off sentiment is underpinned by the trade-war escalations, but also in response to Turkey, Argentina and Venezuela’s persistent economic problems.
Even African assets have fallen heavily as Moody’s warned about risks to South Africa’s fiscal consolidation plans, President Trump raised alarm with land grab tweets and a Nigerian company was fined for alleged improper dividend repatriation, dropping more than 20% on the day.
The strong US dollar is also important, as it should boost export-oriented companies domiciled in weaker-currency regions. Perversely, this is exactly what Donald Trump is trying to unwind, although it should help the multinationals in the UK, Europe and emerging markets.
What Does this Mean for Investors?
It is important to reflect on the above developments momentarily. Many of the faster-growing regions are still experiencing strong corporate earnings, yet have seen asset prices unwind quickly. Yet, to the contrary, here we stand with optimism for US assets seemingly built around the earnings growth story.
Sector performance has been interesting in this regard, with notable gains for industries that are deemed to offer secular growth. Specifically, technology continues to register strong gains, while healthcare has seen a healthy revival since its 2016 lull.
This differs markedly from regions that aren’t experiencing the same tailwinds. The UK is a great example in recent memory, with concerns of a “no-deal” Brexit impacting sentiment in everything from property markets through to the banking sector.
Of course, these developments matter if earnings are impacted, but we must also appreciate that much of the bad news is already reflected in the price. It is a classic case of mindless herding away from a market that carries near-term uncertainty, although we have every reason to believe the long-term earnings are fundamentally durable.
We reiterate our previous message that it's incredibly hard to know how the market backdrop will play out in the near term. We are especially sceptical of anyone trying to position for events in advance as it rarely adds value to portfolio returns. Instead, we advocate that our clients focus on the long term, investing when and where it makes sense to do so. This often involves a preference for the unloved and undervalued, which can be painful in periods like the present, where the expensive get even more expensive, yet it remains the right thing to do.
