In Germany, Angela Merkel announced that she would step down as party leader and would not be seeking re-election as Chancellor in 2021. In the UK, the October summit disappointed, with little progress in the Brexit negotiations. The euro-zone composite PMI fell in October, signalling an annualised GDP growth of only 1.6% at the start of the last quarter of the year.
Following our view on the energy market, with a lower demand than forecast (which did not prevent us reaching our target prices) and as global investors remain overweight on the sector, we reduced our Energy exposure to ‘underweight’.
We increased our cyclical exposure by being ‘overweight’ Technology (mainly semiconductors) and ‘neutral’ Consumer Discretionary, as the recent pullback and strong Earnings momentum in these sectors make them even more attractive.
US equities, which had been a rare comfort zone for investors until September, fell as investors feared that the global economy and earnings might have peaked while the Fed might be over-tightening. Strong results continued this quarter, with all sectors reporting double-digit growth. Cyclicals and Financials outpaced the earnings delivery from Defensive sectors.
The early-month drop in US treasuries appeared to concern investors, with 10Y and 30Y yields reaching their highest levels since 2011 and 2014 respectively, before retracing some of their move in the risk-off mode. The minutes of the September FOMC meeting gave little surprise, reiterating the rate hike guidance for 2019 and strengthening rate hike expectations for this December.
We tactically decreased our technology exposure to neutral as the risk-reward was less justified than in the Health Care sector, in which we remain strongly overweight. We increased our Utilities exposure to neutral in an uncertain political and macro environment.
Emerging markets saw a sell-off amidst global regional weakness – a poor earnings season, negative headlines on the US-China trade war, a spike in the global yield and fears of late-cycle constrained investor sentiment.
Emerging markets continued to decline, underperforming developed markets. LatAm outperformed, driven solely by the Brazilian market, following the victory of Jair Bolsonaro in the Presidential elections and in anticipation of a pro-market agenda. The Mexican market, on the contrary, declined, due primarly to the cancellation of the partially built airport in New Mexico City but also following currency losses over concerns about rising economic policy uncertainties.
Asian equities lost ground following the global weakness emanating from the US. Negative headlines on deteriorating US-China trade tensions, a spike in global yields and a resurgent US dollar joined the persistent overhangs of weak China macro data and liquidity over the month. All Asian currencies except the Philippine Peso weakened while the US dollar rose last month. The Korean Won remained on a losing path as the Bank of Korea kept its rate on hold and treasury yields soared to a 7Y high. The Indian Rupee continued to see pressure from a widening current account deficit, weaker risk appetite and no respite in the Fed tightening cycle.
Any form of stimulus in China, either through RRR cuts or the proposed personal tax cuts, have so far failed to sustainably stop the collapse of the region. Meanwhile, the government acknowledged the slowdown in economic activity on the last day of the month and promised an accommodative stance, especially towards the private sector.
We kept our overweight position on Brazil (but with a negative bias) as the market performed well in October, and on India as the country continued to see some pressure from a widening current account deficit.
We also kept our neutral position on China (with a positive bias for defensive stocks) while monitoring the ongoing trade talks with the US.