Stormy autumn for investors

The fall promises to be uncomfortable. Political changes and European banks in crisis create uncertainty.

Uncertainty, even among professional investors, is on the rise. This is shown, for example, in a survey published in mid-September that Bank of America had conducted among fund managers. 54% of the asset managers surveyed said they currently consider stocks and bonds to be overvalued. Many managers responded by increasing the proportion of money market investments/daily money in their portfolios. To better understand the motives, let's take a look at the U.S. equity market.

Since the second quarter of 2015, U.S. corporate earnings have been falling year-on-year, now for the fifth quarter in a row. Nominal economic growth in the U.S. reached the level of 2.51% in the second quarter of 2016, a level otherwise often measured in recessions. For example, nominal economic growth was 2.2% in the fourth quarter of 2001 and 2.8% in the first quarter of 1991. The S&P 500 was entirely unimpressed by this. From April 1, 2015, to Sept. 30, 2016, the benchmark U.S. stock index rose from 2,059.69 points to 2,168.27 points, an increase of 5.3%. In the meantime, the index marked several new all-time highs. The result of this development is a high valuation of the shares.

Political changes cause uncertainty

But it is not only the valuation level of the stock markets that is currently worrying investors. There are also at least two other issues. On the one hand, there is growing uncertainty about the stability of the European banking system, and on the other, the political agenda is also causing some imponderables.

In the political arena, two dates dominate. On November 8, a new president will be elected in the USA. Both Donald Trump and Hillary Clinton are not exactly considered dream candidates for the office from an economic perspective in metatrader 4. However, there is one important difference between the two. Hillary Clinton's policies are likely to hold far fewer surprises than those of her competitor Donald Trump. His economic policy promises are often in competition with each other, and thus cannot be implemented simultaneously. Consequently, it is difficult to predict what economic policies a possible President Trump will actually implement and who will be the winners and losers of his course. One fear among investors is that Trump could erect trade barriers. This would be a major setback for globalization and could hit global economic growth hard, negatively impacting equities and corporate bonds.

A month after the presidential election in the U.S., the constitutional referendum in Italy is due on December 4. The political fate of Italian Prime Minister Matteo Renzi is linked to this vote. If the referendum, and with it Renzi, fails, this could have significantly more negative consequences for Italy's ailing economy than is currently the case for Spain, where it is also impossible to find a stable majority for a new government in parliament.

Conclusion

Economic growth currently remains stable but low. At the same time, uncertainty has increased and equity and bond valuations are now high in many sectors. In our view, this does not mean that the end of the upswing on the stock market has been reached, but the probability of major setbacks on the stock market has increased significantly. For this reason, we have reduced the risk in our portfolios in recent weeks. The turbulence is likely to provide an opportunity to buy back equity positions at lower prices.