Investors looking to reduce risk

MARKET sentiment has turned decidedly negative despite current global economic growth fundamentals being the strongest this century.

Forsyth Barr broker Suzanne Kinnaird said after a nineyear bull market, investors had been looking for reasons to sell or reduce for some time.

Last year was unique because of strong asset price returns, almost zero volatility and an increasing correlation between asset classes.

‘‘This is now being unwound with volatility back and correlations starting to again widen.’’

There were several options to pick as the reason for current negative sentiment. It might not be one issue but the convergence and timing of several, she said.

Technicians had been calling for a significant market correction and once markets broke downside support, high volume selling occurred. Markets went down faster they went up.

Technology stocks were market leaders in 2017. Faang stocks — Facebook, Apple, Amazon, Netflix and Google — were up more than 46%, compared with the S&P 500 index which was up only 19%, Ms Kinnaird said.

The sector suffered from a connectivity issue as many people used or relied on the apps on social media. News travelled fast — both positive and negative.

‘‘If there is a sense our whole fabric of communicating and working is under threat due to security/ reliability issues, high valuations will be questioned — and hard.’’

The United States Federal Reserve continued to lift interest rates, even in the face of mixed global inflation data, she said.

The policy direction was in response to growth and labour market strength rather than overt pricing pressures.

US 10year treasury bills had struggled to move above 2.9%, suggesting the market was questioning the Fed’s policy stance.

US President Donald Trump reluctantly signed a $US1.3 trillion ($NZ1.8 trillion) fiscal expansion spending Bill with a focus on rebuilding military capabilities.

The spotlight was now focused on the US twin deficits and the financial balancing needed in future, in particular with existing entitlements and future fiscal deficits.

The affordability of tax cuts taking effect this year was being questioned, Ms Kinnaird said.

Protectionist trade announcements from the US was domestic political tension spilling over into the international arena.

The inexperience of the Trump team and the revolving door for senior staff meant a lack of continuity, leading to increasing uncertainty globally and domestically regarding the direction of the US.

A policy of fiscal expansion at a time of underlying economic strength was not consistent with a target of reducing the trade deficit. A stronger economy should be expected to increase demand for imports, not reduce them, she said.

It was not a time to be taking large risks.

Global Performance in Manufacturing Indices had softened recently but it was not unexpected after a long period of upward momentum, Ms Kinnaird said.

Soft data such as CEO Sentiment indices, business and consumer sentiment surveys, and activity indices such as trucking and transport, were all at or near record levels.

Hard data such as PMI indices remained close to their highest readings. However, the market was concentrating on all the uncertainty. With valuations still near 2017 highs, investors felt it was time to reduce the risk, she said.

Approaching quarter and monthend data no doubt played a part. a Commodity prices such as iron ore and copper had tumbled recently, possibly reflecting lower aggregate demand, while the failure of longterm interest rates to keep ticking higher suggested disinflationary risks remained.

‘‘While we remain overweight in global equities based on our outlook for the underlying growth in earnings, a defensive stance may be more appropriate with ongoing cash flows at the moment.

‘‘That is, if you have cash to invest, it may pay to be patient before allocating to growth assets, as time will be your friend in this market.’’

Bonds and fixed income investments looked fair value, Ms Kinnaird said.

Forsyth Barr remained unhedged on the global exposures which should provide a natural hedge in any ‘‘black swan’’, or unexpected and unprecedented, event.

❛ . . . if you have cash to invest, it may pay to be patient before allocating to growth assets, as time will be your friend in this market