October was a torrid month for most investors. Volatility spiked higher and most indices fell across the board. Most equity markets are down significantly, year to date (to 31 October).
Performance for October and YTD:
- S&P500 Total Return (TR) index: down 6.8%, but still up 3% YTD.
- MSCI World TR index: down 7.3% and down -1.9% YTD.
- MSCI EAFE TR: down 7.95% and down 8.86% YTD
- MSCI Emerging Market: down 8.7% and down 15.45% YTD
- MSCI All China + HK and Taiwan: down 11% and 22.4% YTD
Bond markets were also hammered in October.
- High Yield Corporate bond ETF (HYG) TR: down 2%, but is up 80bps YTD.
- 20yr Treasury Bond ETF (TLT): down 3% and is down 8.98% YTD.
- Emerging market bonds have fared even worse, with the local currency EM bond ETF down over 10%.
Our clients and strategies outperformed in both October and YTD.
- MWCM’s core FoF account was down only 20bps for the month and remains up 2.26% YTD. A few of our managers have not yet reported, but early indications are they will reduce this by no more than 40bps. Still, a reasonable result.
- Our Equity basket was down 4% for the month, but remains up 30% YTD. In our mid-October Insights, we expected the market to weaken further and rebound. That all played out. We took the opportunity to add to our equity exposure at the end of the month to capture some of this.
While significantly outperforming the markets in general, we feel we could have done better. A number of our managers have had a terrific year, with one now up over 25% and a few up 5% or more.
Other managers though, have struggled to maintain their performance, particularly equity long-short. We would have expected them to read the environment a little better. Given our in depth knowledge of their strategies and positions, we do though expect this to be a temporary phenomenon. We are confident that our managers will do well through a cycle.
The real question now is ‘what is next for the markets?’.
In our last few Insights we highlighted a number of issues that the market is focusing on. These haven’t changed in a month.
We all know timing the market is a fool’s game. Rather, it is far better to have a longer-term viewpoint based on solid fundamentals and then to adjust exposure, as and when opportunities arise.
On that premise, we are still very cautious on the markets and look to sell into rallies and buy dips. We expect 2019 and 2020 to be periods of high volatility – as the realities of what drove the last decade’s growth is made plain for all to see, namely DEBT.
Even Goldman Sachs is highlighting that the risk of a sell-off is high. They don’t, however, currently expect one as the US economy is still relatively strong.
But what about the short-term? The next few months? The last quarter is normally a good one in the markets:
- The S&P has rallied an average of 7.4% from October lows to year-end, over the last 68 years.
- The data is better for midterm (election) years, with the S&P up over 10% on average from the October lows to the close of the year.
So, given historical trends, we should expect the market to move higher into year-end.
What concerns us though, is the number of markets and stocks that look to be in a technical bear pattern. The Hang Seng and the Emerging market index ETF (EEM) are good examples of this, with the index failing to break solidly above the 50-day moving average, something it has tested several times on the way down (China, and China Technology, is a big drag on these markets, both in terms of growth outlook but also in terms of weight within the EM index).
The same is true for other markets, such as the FTSE, Europe and the Russell 2000.
A very large number of stocks we track are also in this downward trend with the stock price failing to crack above the 50-day moving average. The DJ Technology index has also failed to break higher than the 200dma which is now providing resistance.
There is, it appears to us, still a general lack of strength in the market. Yesterday (Monday 11th November 18) saw another market decline with the S&P down close to 2%. Again, this market has failed to break above its 50dma.
Thus, we’re still nervous holding equity exposure. My worry is that strength won’t come unless we see some major change in the geopolitical landscape, with the trade war issue being resolved, or some massive liquidity injection by the Chinese. It should be noted though, that even if China provides a massive liquidity injection, it is still only kicking the can further down the road.
What about those that advocate buying the dip?
A real concern of ours, is that so many retail investors are not prepared for any sort of major market sell-off.
‘Buying the dip’ (BTD), has worked well for some time and is still being promoted by many advisors. The latest ploy of many investment advisors (a few of which are real ‘snake oil salesmen’ in our view), is to buy emerging markets, because they have been sold down more than other asset classes.
According to them, EM is now ‘cheap’. What they don’t mention or raise concern over is that we are very late cycle, that liquidity is much tighter and that major economies are short on USD, the cost of which has ramped up significantly. Not to mention that emerging markets were massive beneficiaries of easy developed-market monetary policies, which is now in tightening mode. I fear most client advisors just want to keep clients fully invested. Even worse is that many clients have levered up exposure. Advisors typically get a share of the interest revenue, so leverage is extremely profitable for them.
It’s just not fair to their clients. The advisors unfortunately don’t really care as it’s not their money.
This is not to say that we don’t find some value in the emerging markets. We do like a few of the technology names in China as well as Argentina. Our risk exposure at the moment though is very low and we take very small high beta positions where we deem the opportunity is validated.
How does MWCM manage money? The same way we run our own.
We like to focus on risk, thinking about what will cause the market to deviate from it’s generally expected upward trend, so that we can adjust exposure and have plenty of dry powder at market lows. Thankfully, these down cycles only come around every decade or so, but when they do one must be ready for them.
With this in mind, we are cutting back on risk where we can into the rallies. Once we are more confident of the trend, we will also look for shorting opportunities, either doing so ourselves or via capable managers. Our focus is on maintaining our outperformance.
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