October was a very difficult month for markets. We saw a lot of volatility, with global equity markets falling significantly during the month. We’re sticking to our fundamental view that the outlook for the global economy remains positive, and what we’ve seen in October is a short-term shift in sentiment.
How bad was October?
It was certainly quite bad. Global stock markets fell by almost 8% during the month. If you look at the history of global stock markets since 1970, this ranks as the 22nd worst month on record. Meaning, in nearly 50 years, October 2018 is in the worst 4% of months.
Across the 46 markets we look at, only one – Brazil – managed a positive return. Beneath the market losses, there were some individual companies that suffered big losses. For instance, Amazon’s share price fell by over 20% during the month.
Other assets didn’t do particularly well either. Bonds only produced a small gain, so overall, it was a tough month for financial markets.
What caused such a big global decline?
The US equity market had two days in October when the market fell by over 3%. When prices move so quickly, investors, analysts and the press often try to attach a story to it, to rationalise the decline.
We’ve done a lot of work looking at a wide range of data to understand why prices fell so sharply. We’ve also spent a lot of time assessing investment research from other sources, like US investment banks. Overall, the data suggests this move really lacked a fundamental catalyst that caused the decline – for example if the global economy had weakened significantly. Instead, the data points to a de-risking by short-term investors due to a sudden shift in sentiment, whereas long-term investors do not appear to have changed their view.
How did UK markets perform?
UK markets are rarely immune from what happens in the US. UK equity prices fell by 5.4%, less than global markets as UK stocks tend to be lower risk than other markets, but also helped by the fact that the pound fell by 2%. So far this year the UK market has declined by 8.3%.
UK government bonds managed to deliver a 1% return and company bonds returned 0.5% in over the month of October.
And have these market conditions been reflected in how the Nutmeg fully managed portfolios performed?
Not surprisingly, we felt a lot of the fall in equities. Portfolio losses were around 4.5% for mid-risk portfolios and around 6.5% for the highest risk portfolios. That’s a lower decline than global equity markets, but it’s still a big loss. In fact, it’s our largest ever monthly loss. Sometimes markets lose value over a longer period of time, but the fall in October was more of a short, sharp shock.
The big question is – is this normal? Every day we run a full set of risk statistics on our portfolios to simulate what kind of losses we should expect when markets turn sour. Overall, this is about in line with what we would expect a bad month to look like.
So, we don’t think it’s abnormal to see these losses in the context of long-term investing, but of course it goes without saying that it’s difficult to experience.
So, have the investment team made any changes to the fully managed portfolios?
We made some small changes last month, reducing our exposure to UK and Eurozone stocks, increasing holdings in Japan and Nordic countries, but this wasn’t really focused on mitigating the volatility we’ve seen. It was more about positioning for growth in Japan and the Nordics.
But ultimately, it comes down to this question: if your view about the longer-term fundamental outlook hasn’t changed, should you make changes to your portfolio when prices go down? When we look at the past 30 years, the data is pretty clear: when markets are really very volatile, like now, returns over the next year are positive in almost every case – unless there’s a US recession around the corner. We absolutely don’t see a US recession in 2019 as a big risk at the moment.
We’re sticking to our core fundamental view that the outlook for equities remains positive.
Whether it was via our customer support team or our social media channels, we heard our customers’ concerns about the markets and their portfolio performance during October.
So, this month, instead of answering a single customer question, Shaun read every question or comment about performance and has responded to the main themes.
Unsurprisingly, there were quite a few concerns about the speed of the decline. There are two common themes I’d like to tackle.
Firstly, some of you highlighted that the gains you’ve made in the past accumulated slowly over a matter of months, but losses have come quickly over a few weeks. There is a good explanation for this.
A lot of the long-term returns from investing come from income, like dividends and interest payments on bonds. This income tends to flow steadily. The income from stocks typically runs at about 3-4% per year, but on the other hand, stock prices can fall very quickly causing this impression of slow gains and sudden losses. So, it’s important to remember that these sharp declines in equity prices are never permanent unless you sell, and prices can easily snap back.
Secondly, another common question is to ask what we are doing to make the gains back. Psychologically, it can feel positive and comforting to make changes at a time of heightened volatility, but often this is counterproductive. We think it’s critically important not to overreact in the face of short-term volatility.
History shows us that by trying to take money out of the market and put it back in at the right time – known as market timing – is incredibly difficult. In practice, trying to do that tends to result in even greater losses, because markets can bounce back quickly and unexpectedly.
Instead, we’re continuing to do a lot of analysis about what the future will look like, making sensible decisions about risks, looking for opportunities, and most importantly pinning our decisions on hard data rather than sentiment which can swing back and forth.
About this update: This update was filmed on 7th November 2018 and covers figures for the full month of October 2018 unless otherwise stated. Data sources: Bloomberg, Macrobond, Nutmeg.
Risk warning
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance and forecasts are not reliable indicators of future performance.
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Shaun Port
Shaun is the chief investment officer at Nutmeg. He has over 25 years’ experience developing and implementing investment strategies for clients ranging from central banks to pension schemes to charities and private individuals. Shaun holds a degree in Mathematical Economics from the University of Birmingham and is a Chartered Alternative Investment Analyst. He can be found tweeting @ShaunPort.Other posts by Shaun Port
