15 Oktober 2018
The sharp sell-off in the US has likely caught no one by surprise. If anything, investors have been wondering how, in the face of tighter monetary policy, a contracting labour market and rising oil prices, the US has continued to be so resilient.
Long momentum, short volatility
There are myriad explanations, but I believe that the price action of 2018 reinforces the idea that both active investors and the growing constituency of passive and systematic strategies have been long momentum and short volatility.
In other words, investors are concerned about an uncertain political and economic outlook, and have chosen both asset classes and sectors which appear to offer more robust fundamental prospects and which have demonstrated more predictable price action.
Hunt for value
In this period, the concept of value has become secondary to the focus on the bumpiness of the path. The converse of this is that we have seen significant falls in parts of the market where uncertainty is high, such as emerging markets, China and the UK, all of which are now trading at historically low valuations.
Given that the medium term outlook for the global economy remains robust and the gradual withdrawal of monetary stimulus is a sign of a return to more normal conditions, the right response for investors to signs of the US market finally losing momentum is to hunt for value in areas which have already been aggressively sold down.
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