European equities performed well, with global investors relieved by a potential Brexit deal and a better-than-expected earnings season. The situation significantly improved after a deal was agreed between the UK and the EU and after Boris Johnson won the first-ever majority in Parliament for a withdrawal pact, but MPs voted down the accelerated timetable to get the deal done by October 31, leading to an extension of Article 50 and an early election in the UK on 12 December. Cyclicals and Value extended their gains while Defensives and Growth lagged.
We continued to position our portfolios towards more Value names, as they are rather cheap, with potential upside on the short term. As a result, we cut our ‘underweight’ position in Industrials to be ‘neutral’, as with hopes of a trade deal between the US and China looking like it might favour capital expenditure. We also decided to increase our Automobile exposure to be ‘overweight’ based on recent trade deal improvement and strong Q3 results while being rather cheap and under owned by global investors. Consequently, we become ‘neutral’ on Consumer Discretionary while keeping our ‘underweight’ position towards luxury stocks based on high valuation.
Any further positive outcome to the Brexit negotiations or the US-China trade talks or decisions from future members of the ECB and the European Commission could be potential short-term supportive factors for the region.
Global stock markets ended the month of October at record highs. The rally was driven by several factors: China and the US moving closer to a partial trade agreement, a no-deal-Brexit delay, central banks reiterating their dovish stance (with the FED cutting rates) and, last but not least, solid Q3 results.
US equities had a solid month in October, with almost all sectors performing well, except for some of the defensives.
The FOMC cut the fed funds rate target range by 25bp, as expected, but also signalled their intention to pause the easing cycle.
We saw very solid results in Health Care – and Communication Services like Alphabet and Facebook – which clearly outperformed the broader equity markets, confirming that online advertising continues to grow significantly. Most semiconductor companies also posted better-than-expected results, while giving reassuring guidance. The picture for industrials was slightly different, in that results were rather weak, although guidance indicated that the worst was probably behind us, for now.
We kept our negative stance on Energy based on poor earnings revisions, while still positive on Information Technology (mainly hardware and semiconductors). We are still overweight Health Care as the sector has continued to deliver strong results. We continued to increase our value exposure, as it is rather cheap, while keeping a positive stance on US equities.
Emerging Markets were relieved by a potential trade truce and economic stabilization.
Growing efforts by global central banks, not only the Fed and ECB, but also several EM central banks, as well as hopeful developments on the US-China trade negotiations and even some optimism on an earnings recovery and a weaker USD, were behind strong global equity markets in October.
Asia outperformed other regions, as China rallied on hopes of a first partial trade agreement with the US, as well as some economic stabilization. India (rate cut and some possible investor-friendly measures), Korea (rate cut and a recovery in consumer and tech sectors) and Taiwan (+8%! on China and a tech recovery) were also strong, at the expense of underperforming ASEAN markets. LATAM, too, joined the positive sentiment in October, led by Brazil (enjoying another 50 bp rate cut and an approval of the pension reform bill), Colombia and Mexico.
Adversely, severe anti-government protests in Chile, Ecuador and Bolivia, and the presidential election result in Argentina, led to strong market and currency weakness. While most EMEA markets did well, with Central Europe and Russia (up almost 8% on a rate cut and strong energy prices) rallying, Turkey fell victim to strong profit-taking, despite a strong rate cut, on the back of the raids in Syria and potential US sanctions. With a weaker USD, most EM currencies gained. Almost all sectors, too, gained, led by healthcare and technology.
We kept our neutral positions in Brazil and Taiwan, with a slightly positive stance towards value names. We increased our exposure to China to ‘overweight’ while reducing our positions in ASEAN to ‘underweight’, as we are geared more to playing some cyclical and value names rather than defensives. As a result, we kept our overweight position in IT (mainly towards hardware & semiconductors) while reducing our defensive exposure through Consumer Staples by being underweight.