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 This week saw enormous swings across global financial indices as
investors took fright at the potential impact of slowing growth and
inflation, particularly in Europe, just as the United States ends
its huge monetary stimulus program.
Some of the moves were staggering: The 10-year U.S. Treasury yield -
the benchmark reference point for the cost of money around the world
- plunged as low as 1.86 percent, while the Greek 10-year yield
soared above 9 percent and Venezuela's benchmark yield hit nearly 20
percent. Oil fell below $80 a barrel for the first time in more than
four years.
The consensus among major investment banks and fund managers is that
markets overshot and future trends will be calmer.
But for many the question remains: was the recent upheaval a chance
to reset, or are conditions simply too panicky to risk?
"We better fasten our seatbelts," said Giordano Lombardo, group
chief investment officer at Pioneer Investments.
"The current phase of volatility is going to last until we see a
decisive change in the policy mix that... has proved to be
ineffective to lift the rate of growth of the global economy."
Both Wall Street and European bourses saw their highest levels of
turbulence in three years and amid the noise, equity markets came in
for a particularly bad pummeling.
The $5.7 billion that fled European equity funds this week was the
biggest outflow on record, said Bank of America Merrill Lynch (BAML),
adding that global stocks have now shed $4.85 trillion of their
value since mid-September.
That puts valuations now much too low, others estimate.
UBS says corporate earnings for 2015 and beyond would have to be
downgraded by huge amounts in order to reflect recent market moves -
45 percent in German earnings, 40 percent in Europe excluding the
UK, and 29 percent in the United States.
"We believe the scale of the adjustment is not reasonable. This,
again, leads us to think that the market is over-reacting," the
Swiss bank said in a note to clients on Friday.
Equity strategists at Barclays, meanwhile, reckon European stocks
are their cheapest in 15 years when compared to credit market
yields.
THE WATER'S LOVELY..
Many don't have the luxury of choice, however. Among those wading
back into the markets from Monday will be fund managers trying to
keep anxious clients with them and make up recent losses in what
little is left of the investment year.
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The average U.S. stock mutual fund manager lost 2.92 percent in
September, Lipper data for that month showed, compared with a 0.4
percent drop in hedge funds' performance gauge.
And that was before the most recent turmoil: Data for the week ended
Oct. 15 showed that investors in U.S.-based funds pulled a record
$1.3 billion out of European equity funds.
"Before this correction, fund managers were looking at their gains
and wondering whether to book profits," said Yannick Naud, portfolio
manager at Sturgeon Capital.
"Now we don't have that luxury. Investors will want to get back in
and will be looking to buy liquidity, benchmark indexes, basically
big and liquid securities. What you won't see is everyone buying
anything that looks cheap."
The shakeout in bond and credit markets was also dramatic, prompted
by the fact that a huge chunk of the investment community -
according to anecdotal evidence and positioning data - had bet on
U.S. Treasuries prices falling and yields rising.
Painful as this week might have been, the result now is a better
balanced marketplace, strategists say.
UBS pointed out that the outflows from high yield bond markets in
the third quarter reversed nearly half of all the cumulative inflows
since 2009, suggesting that the market is less susceptible to
extreme volatility.
"The skewed short positioning we saw nearly two months ago has given
way to a more balanced picture," Citi's rates strategists said in a
note on Friday.
(Editing by Sophie Walker)
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