Stocks face a new normal in 2018, and thats unsettling.
Is the volatility going away? No. Is Donald Trump going to stop tweeting? No. And why are investors selling stocks on one Trump tweet and buying them back after another?
The Federal Reserve is to blame. Few market participants guessed that the Fed lifting interest rates, while retreating from quantitative easing, would provide such an emotional journey.
NN Investment Partners found that emotion over global equity markets has greatly deteriorated since early March, to its weakest level since early 2017. Optimists cite global expansion, but NN also tested that theory. Its Global Cycle Indicator captured over 70 household and business surveys globally and revealed that, for the first time since 2016, business cycle momentum was no longer improving, compared to three months earlier.
According to Valentijn van Nieuwenhuijzen, chief investment officer of NN, this explains why the market has become more exposed to risk factors stemming from politics or headwinds for the technology sector.
Tax reform, regulatory reform, and infrastructure spending should have encouraged greater capital spending to stretch out the economic cycle, but c-suite confidence has been sapped by tough trade talk, Syria, and every other threat Trump creates.
Volatility tends to rise as we reach the end of the cycle, because business takes more risks, says Kokou Agbo-Bloua, global head of flow strategy and solutions at Societe Generale.
Few are advocating that investors “hit the sidelines”. Instead, active managers – who are eager to prove their worth and reverse the stampede into index trackers like exchange-traded funds – will suggest long/short equity strategies, and good old-fashioned stock picking and protection.
Bonds typically provide shelter when equities sell off — but they didnt in the February rout.
Agbo-Bloua said investors can no longer rely on bonds, so need to think about owning protection.
Others – like David Miller, investment director of Quilter Cheviot – recommend embracing the volatility, as you cant just buy the index and sit back. But Miller disagrees with hedging as the cost can destroy returns.
Raking through the Stoxx 600 serves up trading ideas. The top performing European stocks in 2018 are takeover plays such as biotech firm Ablynx, which is being taken over by Sanofi; NEX Group, thanks to an approach from CME Group; GKN, after Melrose has fought to acquire it; Smurfit Kappa, after an unsolicited approach from International Paper; and Ocado as it inks international deals.
Luxury also crops up thanks to stronger earnings. French multinational LVMH hit a record high last week after reporting.
UK heavy hitters Tesco and Easyjet have decoupled from their indices and sectors this year.
Ralph Jainz, fund manager of Centricus Asset Management, says the UK has huge dispersion between some of the most undervalued and overvalued names thanks to Brexit uncertainty.
If you havent done so already, change your game plan for 2018.
