Trends that held in financial markets for much of the year have turned around in the final quarter, spurring a challenge to investors as they consider a global economy in flux.
Take the stock market. American equities have been the stand-out performers for most of 2018, but are now falling short relative to emerging markets — the big laggards in the second and third quarters. Among the G10 currencies, the Australian and New Zealand dollars were two of the three worst performers for the first nine months of 2018, but are now the best. In bonds, Indonesian debt was among some of the most beaten down, but is now flying.
A debate is emerging over whether the recent pattern is a blip or the beginning of a more sustained recalibration. Among the underlying questions are whether the technology sector that propelled US gains is entering a major slowdown, whether American yields will keep rising — helping the greenback and financial stocks along the way — and how China will fare in managing its slowdown and trade war with the US
For the strategists at Citigroup, the recent underperformance of US stocks compared with emerging markets will pass, with American shares leading again. But Goldman Sachs Group sees the recent appreciation in the Australian dollar continuing against the euro.
The following charts illustrate some of the shifting trends across asset classes:
The MSCI Emerging Markets Index is up 3.3% this month, more than two percentage points higher than the S&P 500 Index and the MSCI World Index of developed-market shares. Of course, the rally is from a position that’s seen the developing nation gauge trail in 2018 by about 17 percentage points.
Through the end of last month, the Australian dollar was tied with Sweden’s Krona as the worst performing G-10 currency against the dollar this year. Since then it is up about 3%, helped by local jobs data this week.
Higher policy rates and other government measures have helped to shore up sentiment toward Indonesia’s bonds. Strong demand at a debt auction this month pushed down the benchmark 10-year yield, breaking below an uptrend it’s been in for most of the year.
The last decade has been rough for value investors, but that’s starting to change as growth stocks succumb to a sell-off. That has handed the American value index a two percentage point edge over growth since the start of October as the FAANG block gets hammered.
Crude was among the best-performing assets going into the final quarter of 2018. As OPEC over-supply concerns ratcheted up amid signs of waning demand, oil has collapsed into a bear market with six straight weeks of losses.
The leaders of the bull market in US stocks have been tumbling. The world’s largest company, Apple, is down 18% from its peak in early October. Facebook has seen its market value shrink by about one-third since reaching a record in July.
“Investors have been trying to shed some of their overweight positions in the US market,” Larry Hatheway, group head of investment solutions and chief economist at GAM Holding AG, told Bloomberg TV in Dubai. “FAANGs are a classic case in point, one of the favourite plays in the first nine months of this year has also led the way down.”
One vital trend for many strategies is the direction of the dollar, the world’s reserve currency. From a steady downtrend through much of 2017, the greenback witnessed a resurgence into the second half of this year, sparking turmoil in assets from emerging markets to commodities. At the moment, hedge funds are convinced the run will last. Net long speculative bets on the currency are at the highest since the start of 2017.