Global equities had a tough October, but a recovery now looks likely. Nonetheless, volatility will remain an issue, with markets focused on geopolitical issues rather than economic fundamentals. Perceptions could diverge from reality.

1. October proved a difficult month for equities, but several factors will support a future recovery.

Global equities ended October on a positive note, with good earnings news in both the U.S. and Europe lifting markets in the closing days of the month. But October as a whole proved bruising for investors: the S&P 500 was down over 6% and the Stoxx Europe 600 over 5%. The Hang Seng Index fell over 10%, adding to substantial previous declines. As we have pointed out before, higher volatility is to be expected in a late cycle environment and increased volatility is also common in the run-up to U.S. mid-term elections. Several factors support the case for a future equity markets recovery: U.S. earnings remain supportive (page 3) and history suggests that markets prosper after U.S. midterm elections, even if they result in a split “government” (page 6). We have recently launched a High Conviction Idea on Chinese equities. For the developed markets, our 12 month market forecasts suggest that decent gains are possible from current levels. But this upward path is likely to be interrupted by periods of volatility.


2. The markets’ focus on multiple global issues may lead to more volatility, as seen recently in oil prices.

Higher volatility is of course not a surprise in a late-cycle environment. But volatility could be further boosted this time around by a change in what the markets are focusing on. As we discuss on page 2, in the past U.S. markets have corrected on the basis of fundamental (and measurable) issues such as economic recession, earnings, valuations or uncontrollable inflation – none of which appear to be immediate problems. Instead, the U.S. (and other) markets appear to be taking their cue from a wide selection of global woes: worsening European and Chinese growth, trade disputes, Italy, Brexit and so on. The evolution of these issues is difficult to predict and swings in sentiment around them can prompt large market swings. A very recent example of this has been the movement of oil price in advance of the imposition of U.S. sanctions on November 4. Until very recently, it had been assumed that the removal of Iranian output would result in global supply shortages and oil prices rose in anticipation: now markets have become more concerned about oversupply and oil prices have fallen back (page 8).


3. USD strength continues to be a headwind for some economies and asset classes.

Another factor providing an immediate headwind for some economies and markets is USD strength (page 9). The CNY is one point of focus here; the Reserve Bank of India’s defence of the INR another (page 5).


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