Risk Retreat Ignites Defensive Rotation

|
Includes: ACWF, ACWI, AIIQ, DGT, DTEC, ESGF, ESGW, FIGY, FIHD, FLQG, FLQH, GLQ, HDMV, RWV, VGFO, VT, WBIL, XMX
by: FTSE Russell

By Philip Lawlor, managing director, Global Markets Research

Though buoyed by a late rally, global equity markets ended October in negative territory as investors grappled with the prospect of a more aggressive Fed tightening regime despite slowing global growth, simmering US-China trade tensions and a murkier 2019 profit outlook.

In a global retreat from risk that left few sectors unscathed, the rotation into defensive stocks that began this summer went into overdrive (see chart). Healthcare and high-dividend-paying utility and telecom stocks outperformed more economically-sensitive industrials, energy and technology stocks across major markets. Technology stocks were particularly hard hit in reaction to discouraging guidance from high-profile industry leaders and growing concerns over worsening global demand.

Chart 1. Global defensives outpaced cyclical peers in October's resurgence in risk aversion.

Amid widespread risk aversion, large caps held up better than small caps, and value stocks outperformed growth stocks in most markets (see chart), in a striking reversal trend earlier this year.

Chart 2. The recent rout has seen a rotation from growth to value across most regions.

After initial weakness, US government and investment-grade bonds rallied in the latter half of the month, bolstered by their safe haven status. Commodities were mixed, with gold up and oil lower.

The downdraft triggered a major valuation de-rating that dragged multiples on I/B/E/S consensus 12-month-forward earnings back down to levels last seen in January 2016 (see chart). Notably, the Russell 1000 Index breached its 200-day-moving-average support levels in October, only the third time that's happened since the 2008-09 market crash.

The question for markets now is whether valuations adequately reflect current global macro risks.

Chart 3. Global equity markets have undergone a dramatic valuation de-rating.

---------------

© 2018 London Stock Exchange Group plc and its applicable group undertakings (the "LSE Group"). The LSE Group includes (1) FTSE International Limited ("FTSE"), (2) Frank Russell Company ("Russell"), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, "FTSE GDCM"), (4) MTSNext Limited ("MTSNext"), (5) Mergent, Inc. ("Mergent"), (6) FTSE Fixed Income LLC ("FTSE FI") and (7) The Yield Book Inc ("YB"). All rights reserved.

FTSE Russell® is a trading name of FTSE, Russell, FTSE GDCM, MTS Next Limited, Mergent, FTSE FI and YB. "FTSE®", "Russell®", "FTSE Russell®", "MTS®", "FTSE4Good®", "ICB®", "Mergent®", "WorldBIG®", "USBIG®", "EuroBIG®", "AusBIG®", "The Yield Book®", and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, FTSE GDCM, Mergent, FTSE FI or YB. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.

All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of the FTSE Russell Indexes or the fitness or suitability of the FTSE Russell Indexes for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell Indexes is provided for information purposes only and is not a reliable indicator of future performance.

No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.

No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing contained in this document or accessible through FTSE Russell Indexes, including statistical data and industry reports, should be taken as constituting financial or investment advice or a financial promotion.

No part of this information may be produced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE GDCM, MTSNext, Mergent, FTSE FI, YB and/or their respective licensors.