THE NOVEMBER OUTLOOK: FINDING OPPORTUNITIES IN OCTOBER’S SELL-OFF

Alex Neilson, Investment Manager at Investec Click & Invest comments:

“This month we boosted our allocations of US equities following a sharp dip in US markets which led to excellent buying opportunities. Trade wars, peak earnings fears and rising interest rates inspired an October sell-off that left the S&P 500 down 6.9 per cent by the end of October, its worst month since September 2011. We believe the slump represents a correction – rather than the beginnings of a bear market – and brings the value of US stocks back in line with long term trends.

US indices contain an unrivalled variety of world and industry-leading companies so any opportunity to invest at a discount should be seized upon. There are also reasons to believe conditions in the US could improve after the midterms as the government redoubles efforts to hammer out a trade deal with China.

Given we’re taking an optimistic long-term view of the US’s trade deal with China, it makes sense that we’ve also upped our allocations of emerging markets equities. Last month, Emerging Markets were sold off so heavily that you’re now starting to see some excellent value there, especially given Trump’s clear desire to strike a successful trade deal in the second half of his first term in office. This, combined with positive social and demographic trends, mean we are confident about boosting our EM allocations.”

What is impacting our investment decisions in November?

Trade Wars: These have been bubbling up all year. Although there has been a resolution of the NAFTA deals, there is no sign of any agreement between China and the US. Importantly, both political commentators and market participants have come round to the view that Trump’s crusade against China – which, to be fair, has some merit with respect to restricted access to China’s markets, the misappropriation of intellectual property and the anachronistic status of China under WTO rules – is not just a political stunt ahead of the mid-term elections. He seems to be playing a longer game. There is a non-trivial risk that the situation could escalate, not only in trade terms, but also in diplomatic and even military terms. On balance, though, we at Click & Invest think there is a strong likelihood trade tensions will ease in the long term.

Global Politics: In Europe, Italy’s budget proposal was the most serious addition to a laundry list of political uncertainty. The proposed deficit of 2.4% in 2019, which the coalition government insists will kickstart growth, is deemed too high by the European Commission, ratings agencies and bond vigilantes. The risk of a “doom loop” which brings down Italian banks and propels Italy out of the euro zone is often cited. Elsewhere, the Khashoggi affair has drawn Saudi Arabia into a diplomatic firestorm, with implications for growth in the region and also for the oil price – any sanctions against the Saudis could be met with an oil embargo, although that would be highly punitive to the Saudi economy. A pragmatic view suggests that sacrificial lambs will be found and it will be back to “business as usual” soon enough. Brexit continues to drag, but, in all honesty, is a minimal influence on the global front. It does have more impact on Europe.

Growth downgrades: The highest profile downgrade to estimates came from the IMF, which reduced its forecasts of global GDP growth for both 2018 and 2019 from 3.9% to 3.7%. The main source of the downgrades was Emerging Markets, and this was driven by trade war concerns (as well as some effect from the dollar liquidity squeeze). Lower growth alongside the risk of higher inflation and tighter monetary policy is not a favourable recipe for risk assets.