November 10, 2017

Stocks fall as corporate updates trigger profit-taking

Management comment

The week closed on a dissonant note with volatility returning to the markets on Thursday and long-term rates steepening across the board amid thinly-veiled threats between Europe and the UK regarding the financial conditions of the Brexit.

As an interesting indicator of the overall level of stress, intraday volatility among companies releasing their earnings peaked at its highest level in five years, whereas overall realised market volatility in the S&P 500 index is at its lowest level since 1965. With the markets at all-time highs in almost all economic regions, notably Japan where the Nikkei hit a 26-year peak, a consolidation phase towards year end would not be unusual. Certain quarterly earnings publications were disappointing, chiefly among banks and multinationals exposed to forex volatility or rising commodities prices eroding operating margins. A number of sectors, such as tech stocks, have already massively outperformed on the back of robust operating profits.

In the US, the average weighted performance returned by the FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) exceeds 45% vs 25% for the NASDAQ and 15% for the S&P 500. Meanwhile, the monetary situation now appears relatively clear, with the central banks paying particular attention in terms of intervention and communication. The nomination of Jerome Powell, along with the speech by Mario Draghi, effectively preludes a form of continuity during 2018.  Volatility spikes and temporary market corrections are not unusual even during periods of macroeconomic euphoria supported by an economic recovery, notably in Europe, and by the rise of “cyberalism”, the new economic model combining liberalism, digitalisation and robotisation. Whilst avoiding the excesses experienced in 2000, as “cyber-stocks” are now delivering profits, no one really knows today where digitalisation and robotisation are leading humanity. What is certain on the other hand, is that these two themes will generate further growth in 2018.

A downturn in valuation multiples, which in some case are somewhat over-demanding, will not necessarily be a negative factor and could also provide more advantageous investment opportunities. Certain sectors, such as telecoms, banks, oil and media remain reasonably-priced, particularly in the light of 2018-2019 earnings growth forecasts. Allocations in these sectors should be reviewed.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in November 10th, 2017.

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The week closed on a dissonant note with volatility returning to the markets on Thursday and long-term rates steepening across the board amid thinly-veiled threats between Europe and the UK regarding the financial conditions of the Brexit. As an interesting indicator of the overall level of stress, intraday volatility among companies releasing...
2017-11-10