It is now ‘sell into strength’ not ‘buy the dip’: investors discuss sell-off
With global equities declining to an eight-month low this morning, following sharp falls for US tech stocks, investors weigh in on what triggered the sell-off and discuss the direction of markets from here.
Witold Bahrke, senior macro strategist at Nordea Asset Management
Some market pundits claim there is no real ‘new news’, but in our view, we have reached a critical mass on negative news, which has triggered this sell-off. Bond yields spiking adding to monetary headwinds, global growth indicators (PMIs) falling and lastly political risk rising in the shape of the ongoing trade war, as well as Italy, are keeping investors awake at night. Each single issue is not new, but adding it all up you get a toxic cocktail for markets. Altogether, the stock sell-off supports our view the market narrative is changing from ‘buy the dip’ to ‘sell into strength’.
Fabrizio Quirighetti, co-head of multi-asset at SYZ Asset Management
We believe the recent correction has been triggered by the increase in US real rates, rather than inflation concerns, as was the case at end of January and the beginning of February. The realisation after the Fed’s meeting and Jerome Powell’s comments is that the Fed will continue to hike in 2019 – possibly at the same pace as this year. In other words, Powell signalled the Fed is now committed to bringing rates to a ‘neutral level’ and potentially beyond, as its two objectives are fulfilled.
As the Fed is draining liquidity from markets, the few sectors which were quite resilient so far, such as US small caps or US technology stocks, have suffered the most since the beginning of the month. We think it’s a ‘healthy’ rebalancing correction, but we are somewhat concerned if this liquidity squeeze continues, it may severely affect credit, with ripple effects on the real economy and more negative impacts on broad financial markets.
Chris Alderson, head of international equity at T. Rowe Price
We are heading into the hardest part of the cycle. It’s ten years since the collapse of Lehman Brothers and the punch bowl is finally being taken away. This year was probably as good as it is going to get for US earnings growth. Next year will probably remain a reasonable environment for risk assets, but not as good as it has been for the past few years.
Joe Amato, chief investment officer – equities at Neuberger Berman
Equity markets tend not to go up in the straight line we have gotten used to since mid-2016. They do not need a recession as an excuse to correct, either – tightening conditions can push stock prices down even when earnings are sustained. Even if the current volatility turns out to be another false alarm, we still think it makes sense to use risk-market rallies over the coming months to adopt a more defensive stance.
Mark Appleton, global head of multi-asset strategy at Ashburton Investments
The apparent trigger for the recent fallout was a rising US 10-year treasury yield – the world’s risk-free rate. With equity markets previously well-supported by a goldilocks environment, the prospect of the removal of one of these pillars of support – low interest rates – spooked the market.
There are a few reasons to be concerned, such as the tightening of US monetary conditions and the lack of US dollar liquidity, as well as the slowdown of the Chinese economy and elevated oil prices. However, there are also factors to consider before descending into panic. Core inflationary pressures are under control, with slow and gentle rate hikes. We do not anticipate US long-bond yields will continue to go much higher. On top of this, earnings growth is still robust, so we are certainly not panicking.
While we have taken a conservative view on risk assets in our multi-asset solutions, we are not seeing much new evidence to change the global macro view which underpins our asset allocation. In other words, we are not looking to reduce risk exposure in these panicky times. It’s impossible to say where sentiment will take this market in the very short term, but we think investors should stay the course.
David Slater, portfolio manager of Trium Macro Rates
Yesterday’s sell-off in equities had a sense of inevitability and familiarity. For a while, bonds were pushing lower while equities climbed higher – both trending strongly and displaying minimal volatility. Last Wednesday, when 10-year treasury yields broke the previous 3.11% high from May, the reaction from equities was fairly muted. However, over the next few sessions, yields continued to creep up to 3.25% and over the last week, a trickle down in equities turned into a cascade. Even though the Vix breached the 20-point barrier, and bond yields eventually retreated towards 3.15%, this sell-off was rapid but fairly orderly.
Market reaction has been that this was a necessary adjustment, rather than a crisis. From here, the question is whether equities will hold this new level, especially if bonds sell off further or if data – such as today’s inflation figures – remains strong.