US selloff most likely a correction: Adrian Mowat
“After a volatile October, expect US markets to stabilise and reassert an upward trend.”
What do you make of the ferocity of the overnight selloff in the US markets overnight? Do you view it as a correction or the beginning of something more serious in terms of a reversal?
It is most likely a correction and very similar to the events that we saw late January, early February. In January, there was a big move with bond yields going up to 2.8% in the US, which belatedly caused a correction both in emerging markets as well as the US equities, including the tech space.
In September, US bond yields moved up from 2.8% to 3.2% and that has belatedly caused a correction particularly in tech stocks which have higher valuations and therefore are more sensitive discount wise. Beyond that, I do not see any particular strong fundamental reason for this move in the markets. After a relatively volatile October, I expect US markets to stabilise and begin to reassert an upward trend.
What about President Trump’s comments indicating that the Fed may be running ahead when it comes to hiking interest rates? The underlying message is that growth may not be looking as great as one had anticipated. What is your view?
I will dodge specifically talking about President Trump’s comments but if we think about Powell’s and other Fedmembers’ comments, the US economy is slowing, unemployment is at extremely low levels, we have a rising fiscal deficit with the tax cuts and therefore the market has been talking a lot more about what neutral interest rates are in the US. I am talking about numbers where the short term interest rates will be above 3% and therefore around 3.2% on long rates.
At the moment, the economic data is still very supportive of capital markets. The question is what is going to be happening this time next year in the United States economy? You would not have the same fiscal impetus that you have this year with the tax cuts, plus you will have had some effect of higher rates. One of the arguments explaining why the market has corrected is concerns about growth later in 2019 and also what that means for earnings.
But I think it is more a story of a deceleration as opposed to looking for a contraction in either economic activity or earnings.
Do you sense that India will be swept across if US markets were to fall further or would we be less affected because we have already fallen so much?
The technical positioning of EM equities is more favourable than the correction in January this year. You will see redemptions but I do not think the magnitude of redemptions would be as extreme as we have seen when positioning was very bullish in late 2017.
Do you buy this decline in India or is it going to be foolish to try and catch the falling knife? Or ahould one start buying in a staggered manner?
The driver of today’s correction is the mood in the United States and it is better for investors in risk assets to wait for some stability in the US. And once they see that and there has been collateral damage in other capital markets, then they can take advantage of those more attractive prices. Stability, most importantly in NASDAQ. It is still up about 8% year to date even with the moves we have seen in October and it has been the tech stocks that have been key to leading the US rally.