Reflecting on October
What has happened?
Equity markets experienced a difficult October. The MSCI World Index declined by 7.4% during the month, its worst monthly performance since May 2012, while the MSCI Emerging Markets Index fell 8.8%, its worst performance since 2015. The VIX Index, a measure of equity market volatility, jumped during the month to reach its highest level since February.
Concerns over rising interest rates and global growth were amongst the predominant drivers of the equity market decline in October. Having raised interest rates for the eighth time in less than three years in September, the Federal Reserve’s Chair Jay Powell spoke positively on the US economy during October, leading to concerns that the Fed was set to increase the frequency of its interest rate hikes, at a time when there were signs in economic data and corporate announcements that the ongoing trade dispute between the US and China was beginning to have an impact.
As well impacting the valuations of equity markets, rising interest rates can also affect the borrowing costs and therefore the profitability of businesses. However, going into third quarter results season it was considered that corporate health, at least from a sales and profitability perspective, was strong, and that positive earnings announcements might help to offset some of the concerns surrounding rates and global growth. This turned out not to be the case as corporate earnings failed to provide any meaningful support to equity markets, with the proportion of US companies beating consensus revenue estimates down from the previous quarter.
What should you take away from it?
The equity market weakness should be viewed in the context of a long bull market that began in 2009 and which has seen a number of similar sharp and volatile pullbacks during its sustained move higher and the last few days are a reminder of how quickly things can change, with positive talks between US President Donald Trump and his Chinese counterpart Xi Jinping supporting a recovery in equity markets.
That said, it can be difficult to predict the outcome of political events so while mindful of event risk, as well as shifts in momentum and fluctuations in quarterly earnings, we remain advocates of taking a long-term approach to equity investment, and continue to look for and to find opportunities that stand to benefit from exposure to structural growth opportunities, as well as high-quality businesses with competitive moats that should be able to perform well through the cycle.
Please speak to your Investment Manager for any further information.
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