Global equities
11 Oct 2018 | By Ian Heslop, Nicholas Wall

Market volatility: managers comment

In the light of recent volatility across world equity markets, three of our leading fund managers offer their interpretations and insights below.

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Ian Heslop, head of global equities:

This latest episode represents a further extension of market volatility following a decade of uninterrupted monetary stimulus. As market participants adapt to this transition we cannot discount near term flashes in market volatility. Indeed, we have already witnessed several clear examples of such episodes this year. Investors’ emotions, reactions to news headlines, and simple profit-taking after a long bull market, all play a role.

From a portfolio perspective, on the global equities desk, we continue to adapt to these changes. They have had an effect on our market dynamics and our dynamic valuation characteristics, two of our five stock selection criteria. However, the effects fall squarely within the return expectations and tolerances of our investment process. The situation is not unknown to us: in our review call with investors earlier this week we drew attention to parallels with previous market environments.

On the global equities desk, we continue to manage the funds within their established risk-return parameters; and, despite the recent volatility, the funds’ return distributions have continued to fall within them.

Nick Wall, co-manager of the Merian Strategic Absolute Return Bond Fund:

The big story is the large drop in US equities overnight, led by the FANGS, and with the NASDAQ down 4%. You can fit an individual narrative around this (such as exposure to China, or hacking fears) but really it is a symptom of the same thing: a reduction in global liquidity and greater competition for capital at a time when the growth outlook is uncertain. US equities had been immune, as US dollars were repatriated, making the asset class the last safe haven, but that flow may well have abated.

We think the trend for weaker bonds could continue, and generally long bonds have been a terrible hedge recently. In this environment, all assets, including safe havens, could struggle to perform well. We like owning the Japanese yen versus the rest of Asia, given the latter’s exposure to higher rates and global supply chains. We like steepeners everywhere as term premium comes back into the long end of the curve, and we like to have credit hedges on.

Salman Siddiqui, fund manager, Merian Global Emerging Markets Fund:

Emerging markets have faced pressure this year, on the back of tightening financial conditions in the US. Volatility has been particularly severe in those countries with large current account deficits such as Argentina and Turkey (two markets that, however, remain relatively small in the context of emerging markets as a whole). Most emerging economies, and indeed the rest of the formerly fragile five nations –  Brazil, South Africa, India and Indonesia – have all done a reasonable job of reducing their current account deficits since 2013’s taper tantrum and thus reducing their financial vulnerability.

That said, fears of monetary tightening have been further exacerbated by the trade war between the US and China. So far around half of all Chinese exports to the US are now impacted by tariffs. We believe that during these times of market stress – even panic in some quarters – it is important to remain calm, focus on fundamentals, and look for opportunities that market sell offs create.

It is worth remembering that those Chinese exports impacted by tariffs represent only about 1% of China’s GDP. Also, we do not invest in companies that are making goods in China to sell overseas. What we are interested in, and remain invested in, are Chinese companies that are serving local Chinese customers, who continue to spend their increasing disposable income on fashion, entertainment and leisure activities.

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