Global investors limp into the fourth quarter of a volatile 2015 nursing the worst financial market returns since the credit bust and banking collapse of 2008 and with few hopes of making up ground before the end of the year.
Of 21 major financial benchmarks tracked by Reuters, only two are up so far this year as slowing growth – most worryingly in China – an emerging market crisis and prolonged uncertainty on when US interest rates might rise have slammed markets around the world.
The exceptions – the US dollar and 10-year US Treasury bonds – have historically been seen as cash-like havens and have posted returns of 6.2 percent and 2.5 percent, respectively.
In the three months to September, they rose 0.4 percent and 3 percent, respectively, with US-based government Treasury funds drawing seven straight weeks of inflows totalling $10 billion (R138bn).
Only German and Italian government bonds joined the dollar and Treasuries in positive territory during the quarter.
That leaves investors in a quandary: do they throw caution to the wind in the fourth quarter and attempt to claw back their losses? Or do they hunker down and ensure that the damage done in the previous three does not get any worse?
Certainly, the investment backdrop got dramatically more challenging in the third quarter.
The volatility in those three months accounts for most of the year-to-date damage investors have suffered, and in some cases all.
The biggest year-to-date declines have been in copper (21 percent), emerging market equities (18 percent) and Brent crude oil (16 percent), the data show.
Billionaire US activist investor Carl Icahn is convinced a serious downturn is looming.
“I am more hedged than I have ever been,” Icahn said this week.
Equities had a poor quarter, and not just in the emerging world.
The Standard & Poor’s 500 had its worst three-month performance in four years and Japan’s Nikkei had its worst since the three months after Lehman Brothers collapsed in late 2008.
Investors in other markets suffered much bigger losses in the three months to September 30.
Chinese A shares listed in Shanghai plunged nearly 30 percent and Brent crude oil shed a quarter of its value.
Analysts have been falling over themselves in recent weeks to issue the most bearish outlook on commodities and emerging markets. Among the most notable was Goldman Sachs’s note earlier this month that oil could fall as low as $20 a barrel.
Such dramatic price swings often herald an imminent reversal.
JP Morgan Asset Management’s strategists are not alone in retaining a positive outlook for the fourth quarter, arguing investors have simply become too bearish.
“Given that we consider US recession risk to be low, the returns offered by higher-quality high-yield credit are now attractive relative to equity,” they wrote in a recent client note.
“We keep our optimism on the US economic outlook and as such remain overweight on developed market equities versus emerging markets, and overweight the US dollar versus emerging market currencies,” they added.
The dollar was the best-performing asset of all in the third quarter, rising 6 percent against a basket of major counterparts on expectations the Federal Reserve will soon lift US rates and as investors sought a safe port in the emerging-market storm.
In its latest Global Financial Stability report published on Tuesday, the International Monetary Fund warned that emerging market firms, which have amassed a record $18 trillion of debt, need careful monitoring as the era of record low interest rates nears its end. – Reuters