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Risk retreat ignites defensive rotation

By Philip Lawlor, managing director, Global Markets Research

Though buoyed by a late rally, global equity markets ended October in negative territory as investors grappled with the prospect of a more aggressive Fed tightening regime despite slowing global growth, simmering US-China trade tensions and a murkier 2019 profit outlook.

In a global retreat from risk that left few sectors unscathed, the rotation into defensive stocks that began this summer went into overdrive (see chart). Health care and high-dividend-paying utility and telecom stocks outperformed more economically sensitive industrials, energy and technology stocks across major markets. Technology stocks were particularly hard hit in reaction to discouraging guidance from high-profile industry leaders and growing concerns over worsening global demand.

 Chart 1. Global defensives outpaced cyclical peers in October’s resurgence in risk aversion.

Amid widespread risk aversion, large caps held up better than small caps, and value stocks outperformed growth stocks in most markets (see chart), in a striking reversal trends earlier this year.

Chart 2. The recent rout has seen a rotation from growth to value across most regions.


After initial weakness, US government and investment-grade bonds rallied in the latter half of the month, bolstered by their safe haven status. Commodities were mixed, with gold up and oil lower.

The downdraft triggered a major valuation de-rating that dragged multiples on I/B/E/S consensus 12-month-forward earnings back down to levels last seen in January 2016 (see chart). Notably, the Russell 1000 Index breached its 200-day-moving-average support levels in October, only the third time that’s happened since the 2008-09 market crash.

The question for markets now is whether valuations adequately reflect current global macro risks.

Chart 3. Global equity markets have undergone a dramatic valuation de-rating.


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