US equity markets have been resilient to rising trade tensions however last week we saw stocks have their worst day in eight months.
The magnitude of the decline was not normal but the fluctuations we have been seeing across financial markets fits squarely into the narrative that markets are simply transitioning from an environment of ultra-easy monetary policy to an environment where markets must stand on their own fundamentals.
We need to keep the recent weakness and volatility in perspective.
FAANG stocks hit their highs over three months ago and US Semiconductors two months before that. The rotation away from tech and early cycle cyclicals and into more defensive areas of equity markets has also been underway for months and this is no better illustrated than in the relative performance between US versus emerging market (EM) equities. Increased price volatility is normal course for a bull market which is mature and global monetary policy which is transitioning to a less favourable setting. While we don’t expect to continue to see 3% sell-off days as the normal course, we do expect to see a continuation in volatility as sentiment swings between optimism and pessimism and as investors continue to evaluate the robustness of fundamentals into a weaker tailwind from easy monetary policy.
It is also important to note that the Australian market has not seen the same decline that the US has seen this past week – while somewhat reactive to the US falls, our market drops remain modest and consistent with expectations.
We continue to believe that what we are seeing is quite normal (daily price moves like this week are expected). The current stage of the cycle and the near to-medium term outlook supports an investment strategy that reduces risk and adding protection/insurance rather than abandoning risk altogether. Your financial adviser will be in a position to best advise on specific investment strategies as they relate to your personal circumstances, however an overview of some recommendations include:
Equities vs bonds: Equities have historically delivered higher returns than bonds and this trend will continue up until the point where either interest rates enter restrictive territory, the pace of rate hikes surprise on the upside or higher rates begin to undermine economic momentum.
Remain weighted towards areas with strong fundamentals rather than chasing oversold assets: We stick to quality growth assets and areas where fundamentals remain strong and risks low. We continue with our US overweight and EM underweight despite potential for a short term EM rebound and concerns around US equities being expensive. Australian equities are fairly priced but lack earnings growth upside.
Raise insurance/protection against downside risks but don’t go defensive yet: The economic cycle remains intact but downside risks are rising. This calls for greater levels of insurance, not abandoning risk. Insurance comes in the form of exposure to assets with a low correlation to both bonds and equities. We recommend exposure to alternatives investments and real assets (i.e. infrastructure).
Avoid areas exposed to higher interest rates and which have limited earnings growth offset. Minimise simple bond proxy exposure where there is little offset either from stronger earnings growth and/or yield support. Historically REITs have been the worst performing sector into rising bond yields. There is limited scope for outperformance when rate risk is elevated. We prefer yield in areas which are priced for yield delivery rather than for growth.
For more information on the US stock market drop and for tailored advice, call us on 1300 726 082 and ask to speak to a financial adviser.
General Advice Warning: This blog may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. It is important that you consider your own situation before acting on any information contained in this blog. Please seek personal financial advice prior to acting on this information.
Disclaimer: Shane Light is an Authorised Representative and John Hopkins Financial Services Pty Ltd is a Corporate Representative of WealthSure Financial Services Pty Ltd Level 1 190 Stirling Street PERTH WA 6000 ACN:130 288 578 AFSL: 326450.
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