Picture this: you are flying on a small airplane 13’000 feet (4’000 meters) above the ground when you feel a tap on your shoulder and hear someone scream: “It’s time… let’s go!” The door opens and you see the world below, your body basically hanging out of the plane. Then you are free-falling at 200km/h before the parachute opens to abruptly slow everything down, leaving you to observe the landscape before you land and stop dumping massive amounts of adrenaline into your veins. It is an experience of a lifetime that goes absolutely against our most primal survival instincts.
Two things strike me as I re-live this experience in my head: First, my absolute confidence that the equipment would work, and second, the certainty that, if it only depended on me, I would have never jumped out of that plane willingly. This got me thinking that in life and the markets, we end up doing a lot of things that are unnatural - either because we believe we have a safety net if things go wrong, or because we have someone, or something, giving us the last push into the unknown.
Looking back at what happened in the markets in September, it felt like if it were not for the certainty that central banks would act as a safety net, investors would have needed more than just a push not to hit the sell button. With a reversal of the previous month’s risk aversion, it was a somewhat positive period for risky assets with safe havens giving back some of the gains of the past couple of months.
- Developed market equities had a positive month, fuelled by interest rate cuts across the globe and the latest not-so-bad developments in the trade war between the US and China. Investors rotated from defensive and high growth tech stocks into more value-oriented sectors, such as energy and financials which have underperformed in the broad markets in recent years. As a result, broad indexes (such as the S&P500) largely outpaced tech oriented ones (such as the Nasdaq) and US markets strongly underperformed value-oriented Europe and Japan (the later with its large swath of undervalued cash-rich companies), which saw significant gains. The S&P500 gained 1.72% in the United States, the STOXX Europe 600 gained 3.60%, while in Japan, the Nikkei 225 jumped by 5.08%.
- Fixed income markets had a mostly negative month, despite easing measures from central banks on both sides of the Atlantic. As investors tried to anticipate some kind of solution for the US-China trade war, the prospect of better-than-anticipated global growth, in response to the easing of tensions between the world’s biggest economies, led to higher interest rates. As a result, some sectors recorded their first negative month in the year. US Treasuries lost 0.83%, US investment grade bonds lost 0.65%, while US high yield bonds ended the month up 0.36%, helped by the strong carry and relative shorter duration of the bonds. In Europe, sovereign bonds lost 0.39%, investment grade bonds lost 0.76% and European high yield bonds lost 0.12%.
- Emerging markets had a positive month, with small gains in bonds, despite the higher yields in US Treasuries. EM equities also saw gains, in line with the overall performance of the asset class in response to the somewhat better prospects in the US-China trade war. EM equities gained 1.69%, while EM bonds gained a meagre 0.04%.
- Oil prices had another negative month, despite an attack on Saudi Arabia’s largest crude production facility, which knocked-out 5% of global oil output. As the country managed to quickly re-establish its oil output to pre-attack levels, the spike in prices was short-lived and it finished 1.87% lower than the previous month.
- Gold fell 3.15% and gave back some of its recent gains thanks to a combination of the risk-on sentiment sweeping through financial markets and the stronger dollar, which helped keep the price of the yellow metal under pressure.
Global markets in numbers
Market Outlook and V3´s position
If jumping out of a plane mid-flight sounds extreme, it is because it goes against all our survival instincts. That is why the feeling of free-falling from 13’000 feet cannot be defined as anything less than an amazingly terrifying ‘out-of-body’ experience. Exhilarating to say the least.
More than being literally ‘grounded’ beings, we are risk-averse most of the time during our lifetimes - not only when confronted with an open door mid-flight, but also in everyday events, where we analyse the risk/reward balance of our decisions. When 2.5 miles above the earth and facing an open door, the decision-making process is pretty straight-forward: If we believe in the parachute and if fear has not taken over us, we might well jump, even if we do not have all the facts and numbers by heart, such as the probability of a parachute not opening, the risk of a mid-air collision with whatever might be out there and so on. It is a somewhat informed decision taken in the heat of the moment based on certain beliefs.
Changing the focus from the skies back to the ground and to financial markets, it is easy to see that as investors, we decide almost daily whether or not to jump. Sometimes, the risks are so overwhelming that we decide to stay put and abort the jump, but on other occasions, we might consider that our investment case is strong enough, that we can count on the protection measures put in place and that our parachute will work as it is supposed to. But looking at the world today, how confident can we be that this will be the case?
Maybe President Trump is going to tweet and send markets spiralling down (or shooting up) once again? Or perhaps US-China relations are going to reach a new low that will see both countries getting even more confrontational, further threatening the already frail global economic growth? What about Brexit, the political mess in Spain, the economic woes in Italy, or even the growing geopolitical tensions in the Middle East? Do you believe that your parachute can withstand all this?
When we look out there and try to make sense of the current state of things, it is hard to think we would be able to jump without being ‘gently’ pushed. Even the presence and support of central banks flooding the markets with cheap money seems not enough of a reliable parachute for us, so we continue looking for protection for our portfolios. Put options give us peace of mind regarding any equity market downturn at this point. At the same time, maybe the sky will clear and equities will extend the already record breaking bull market, even if this seems out of touch with reality and our analysis. For now, we are not giving up our seat on the plane, we remain committed to our previous positioning in corporate and emerging market bonds and in a diversified but protected allocation in equities. However, we might need more than a pep talk in order to take the leap. And you, are you ready to jump?
For more information, please contact our Chief Investment Officer, Cássio H. Valdujo, on:
+41 22 715 0910