Market review – are investors right to be spooked?

Andrew Milligan

With market volatility continuing, Andrew Milligan, Head of Global Strategy at Aberdeen Standard Investments talks about what spooked investors in October and who tends to cause the biggest market moves. He also explains why investors are turning their backs on the technology sector in favour of old world industrial stocks.

It’s not October that spooked investors

When there’s market volatility in October, commentators often mention the month’s reputation for spooking investors. October is well known because of some of the more memorable market events, such as the October 1987 crash. But September, for example, was the month where sterling exited the European exchange rate mechanism and the investment bank Lehman Brothers collapsed.

There’s a famous quote from Mark Twain, the American author: “October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” Twain was quite right that any month can experience volatility.

In last month’s market review, I talked about the major fall in stock prices being fuelled by a combination of concerns around the US and its major trading partners, and likely interest rate increases in the US. This pattern continued into October.

There are a variety of reasons why we’re seeing volatility – politics is clearly one – but an underlying issue is that central banks around the world are no longer increasing the supply of global money to the same extent. Valuations are being checked and re-checked against that backdrop.

Fear not – volatility is normal

Earlier this year we highlighted that after a long period of rather calm markets in 2016-17, it was likely that 2018 onwards would see a return towards more normal levels of market volatility – mainly for the reasons I mention above. And it’s important to remember that swings up and down in share prices, even big moves, are normal behaviour for markets.

The upside from investing in equity markets is potentially higher returns; the downside is greater volatility than holding assets like bonds or real estate for example. The most important thing is to keep calm, check your investments are diverisified, and remember your long-term investment goals.

As for wider economic implications, we don’t think the current high levels of market volatility signal a recession lies ahead. Well, not before 2020 or even 2021 – unless the US and China make some major policy errors of course.

What the big investors buy and sell compounds volatility

In most developed equity markets it’s professional investors – pension funds and insurance companies, hedge funds and sovereign wealth funds – who are making the major investment calls. They’re constantly trying to price in a wide range of economic, corporate, policy and political factors – when the outcomes of various scenarios could be very different.

For example a hard or a soft Brexit matters a lot for UK share prices whereas a full blown trade war between the US and China matters much more for global share prices.

How the big investors interpret potential outcomes, and the decisions they make to buy and sell certain stocks, drives much of the market ups and downs which we see.

Elsewhere, in a digital world, social media can certainly affect certain markets like the Chinese stock markets, where retail investors are particularly important.

Investors turning their back on tech

During this period of volatility across markets, the technology sector has been hit particularly hard. This is partly due to the prices of technology shares being too richly valued. The Nasdaq index has fallen well over 10% from its August peak. In the current earnings season, those tech companies who missed investor expectations were punished very sharply, while those who demonstrated that they could still create good earnings growth survived better.

All ears to rhetoric on rates

The people who decide the path of US interest rates – the governors at the US Federal Reserve – have told investors to expect another two to four rate moves in 2019, depending on how dovish or hawkish the particular Governor is.

All the signs suggest that companies will only pay moderate wage increases in the current environment, meanwhile technological factors keep headline inflation under control.

If the US Federal Reserve becomes aggressive, we should certainly worry, while if it remains on its current path we should not.

Meanwhile the European Central Bank (ECB) has made it clear that it will halt its quantitative easing (QE) bond buying programme at the end of the year and raise interest rates in the second half of 2019 – assuming of course no further shocks to global trade. Despite all the volatility in financial markets, the European economy is showing sufficient growth to ensure slowly rising wages and therefore inflation.

There are still some risks ahead: a disorderly Brexit in March would hurt regional activity, while the Italian government is certainly testing the system with its plans for a large budget deficit. All in all, the ECB remains reactive, not proactive, to global events. At Aberdeen Standard Investments, we’re wary of European bond markets and prefer European equities against this sort of backdrop.

UK Budget 2018

The Chancellor approached this month’s Budget with many of the most important decisions affecting the public finances already made for him, or at least out of his hands. The Prime Minister had already announced the “end of austerity”, and a £20.5 billion increase in NHS spending by 2022, while progress in the Brexit negotiations continue to overshadow almost everything else happening in the economy.

This Budget saw few changes to the UK savings market and markets didn’t move significantly – an outcome that the Chancellor is likely to be happy with. It was also delivered in the context of a global economy that, while growing, is experiencing a lessening of the benefits brought by quantitative easing and low interest rates. As such, the outcomes of events beyond our shores and the looming impact of Brexit are likely to have more influence on UK markets than the Chancellor’s announcements.

Going for growth in a slow growth world

Looking across all sectors, it’s clear that many investors are still looking for growth in a slow growth world – with sectors such as healthcare recently attracting attention. One of the advantages of a sharp fall in share prices is the opportunity to buy attractive assets. This is true for any sector and one of the reasons why we’ve selectively been buying into oversold emerging market assets in recent weeks.


The information in this blog or any response to comments should not be regarded as financial advice. Please remember that the value of your investment can go down as well as up and may be worth less than you paid in.

The information here has been provided by Aberdeen Standard Investments and is based on their understanding in November 2018.