Global stock markets sold off sharply in October as US Treasury yields rose above 3.2%. The mood was classically defensive with global tobacco, utilities, food staples, pharma and telecoms sectors outperforming other more economically sensitive sectors. European, Asian and emerging markets have struggled throughout the year and October was no different. Investors continued to fret over ongoing issues to do with Italy, the US-Sino trade dispute and dollar strength. Until now the US has defied the troubles prevalent in other markets as its economy outshined the rest of the world, propelled by tax cuts and increased government spending.
The S&P 500 fell around 7%, the biggest monthly fall since 2011. Underlying was a sharp rotation out of richly valued growth stocks, of which the most well-known are the FANGS, and into out-of-favour value stocks. Rising treasury yields were certainly a negative factor; growth stocks have a greater proportion of cash flows into the future than value stocks, and their valuations move mechanically higher as discount rates fall.
Interest rates are not the only factor in October’s growth sell-off however. Investors are increasingly worried that strong US economic growth has peaked at a time when Europe is visibly slowing and China remains weak and tries to deleverage. There have been widespread reports by US companies that tariffs are causing a higher cost burden, stretched supply chains, and stagnating exports. The most eye-catching S&P fallers were Amazon and Netflix which fell around 20% each. Investors were shaken after Amazon reported a material slowdown in top-line growth and Netflix said it expected higher costs. It was interesting to see the said victims and competitors of these industry disruptors, Walmart and Comcast, rising around 7.0%.
Elsewhere, developed market bonds had a good month especially Gilts in the UK and German bunds. Italian debt stayed under pressure following September’s budget announcement, to which Brussels asked the coalition to rewrite within three weeks. The Five-Star and Lega Nord coalition want to run a budget deficit of 2.4%; three times greater than the previous government, to allow greater spending on welfare for the poor and unemployed, reduce the pension age, and tax cuts. If Italy does not rewrite its budget, Brussels can begin an ‘excessive budget procedure’ and could issue sanctions after that.
Turning to emerging markets, Brazil’s stock market rose some 17% in US dollar terms after Jair Bolsonaro’s Presidential election victory. Bolsonaro’s social policies are highly controversial, however markets warmed to the fact he is prepared to make some much needed economic reforms, including welfare cuts.
Anna Haugaard, CFA