The latest sell-off marks the first substantial increase in volatility after a lengthy period of relatively quiet markets. While it may be disconcerting for many, it’s critical to understand the background and context – what’s driving global markets – and what this means for our (we’re invested alongside you) investments going forward.
The key advice: There is currently no need to panic. Somewhat counter-intuitively to many individual or retail investors, the markets have been selling off in reaction to the prospect of continuing economic growth in the U.S. and amid strong fundamentals. This growth brings with it the likelihood of rising inflation and therefore higher interest rates – considered by the markets as an impediment to growth and corporate earnings in many cases.
There are also technical reasons behind the latest pull-back. A negative feedback loop has forced some volatility-sensitive investment strategies to exit risk positions. It may blow over quickly (as it did in the summer of 2015) or over the next month, but we don’t expect this to be a problem over the balance of the year.
From Signature’s perspective, this sell-off appears to have been caused by a chain of events that started with a positive U.S. jobs report on February 2 (specifically, the rise in average hourly earnings growth from 2.5% year-on-year in the December 2017 report to 2.9% in January 2018). This led to a sharp sell-off in bonds and equities based on inflation fears. The selling was exacerbated by the reduction of leverage that many market participants were using to get upside exposure. In our view, this sell-off is not driven by a change to company fundamentals.
Signature’s mandates are defensively positioned versus equity market benchmarks. The funds may be well positioned to outperform equity markets on the way down but high beta (more volatile) names will be at risk (the high beta basket has been the most damaged during the recent downturn).
It’s worth noting that volatility itself isn’t necessarily a bad thing – this can also generate opportunities. Signature is overweight cash in our balanced strategies versus bonds, and is looking to deploy cash and increase equity exposure; however, this will be done selectively as the team finds opportunities.
We also expect bond-like equities to perform well if there is another bump as government bonds are not providing the same level of protection that they used to given the current rising rate environment and pick-up in inflation.
This article written by Eric Bushell, CFA
Chief Investment Officer of Signature Global Asset Management.
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