According to Ten Cap’s Jun Bei Lui, the sell-off was unexpected and exacerbated by multiple factors, making it difficult for investors to hedge against.
“The past four weeks have been a shock for equity investors because the unwind came unexpectedly and the multiple drivers meant it was difficult to protect against,” Lui told InvestorDaily.
The concentrated nature of equity returns left investors in “momentum” stocks, sectors or markets particularly vulnerable to the downturn.
“The spark to light the fire was a rapid reversal of ‘best-case’ trade outcomes alongside some softer US data that was then amplified by the unwind of overextended positioning (in over-owned, overhyped and overvalued stocks),” Lui said.
“As we have seen, many stocks, sectors and markets have likely fallen further than the deterioration in fundamentals because positioning unwinds (de-risking) has also taken place as the market started to sell-off.”
Lui admitted that local equity funds have been hit “hard”, with the entire asset class affected regardless of investment style or bias.
“While value stocks have outperformed growth stocks, both have fallen. Similarly, while defensive stocks have outperformed cyclicals, both have fallen,” she said, adding that the sell-off has been particularly challenging for fund managers, as it has largely impacted previous top-performing stocks.
“It has been hard to shelter from unless you were running a ‘poor momentum’ portfolio,” the portfolio manager elaborated.
“We doubt many have been able to escape the sell-off in absolute terms for this reason.”
Does the US remain compelling?
In the US, the S&P 500 is firmly in correction territory, shedding more than 10 per cent from its mid-February record high.
Before the downturn, US markets outperformed, making it natural for fund managers to favour them over weaker regions like Europe and Asia, Lui said.
Ten Cap now expects Europe’s improving outlook, boosted by Germany’s fiscal expansion and potential progress towards ending the Ukraine conflict, to attract capital to the region.
“Europe also has a very strong relative valuation appeal versus the US,” Lui said.
Still, she underscored that Europe hasn’t traditionally been a “structural growth equity destination” like the US, adding that she is not convinced that a relative preference for ex-US equities is a long term structural shift.
“Rather it likely reflects an improving short-term cyclical outlook with more appealing valuation support,” Lui said.
“In sum, we think investors will follow the bouncing ball and go where relative fundamentals look better and this appears in the short term to be outside of the US. But this relative appeal is also a function of valuations and a deeper sell-off in US equities.
“The US is a growth market which has a large proportion of high-quality growth stocks – which you cannot get anywhere else.”
Speaking to InvestorDaily, AMP’s Shane Oliver also noted the shift in investor sentiment, highlighting that the European Central Bank’s capacity to cut rates could drive economic recovery, with European stocks now trading at more attractive valuations than their US counterparts.
However, he warned that the prospect of a 25 per cent tariff on European goods poses a significant risk, particularly for European car makers.
“That could be a concern. So in some ways there’s an argument [of] if you haven’t already reweighted to Europe, maybe wait a little bit and see what is announced in early April out of the US regarding tariffs,” Oliver said.
As for the US, Donald Trump has often touted himself as a man of the markets, posting on Truth Social in July that the Dow Jones gained on the expectation he would win the election – aligning stock rallies to his own success.
But as markets have faltered, just earlier this month in an interview with Fox News, the President said, “you can’t really watch the stock market”.
Notably, Oliver said there is a scenario where Trump begins to change his tune if the market declines become more pronounced, recalling his actions from 2018 when Trump ultimately changed his tune as markets dropped following similar tariff announcements.
“I reckon it’s just because the markets haven’t gone down enough to cause a lot of pain yet. [Trump] would think, well, he’s only been in the office a couple of months or less than a couple of months. What’s an 8 per cent fall in the sharemarket?” Oliver said.
“So I would say it’s early days. I think ultimately, Trump still worries about what the sharemarket is doing, and would still see it as a barometer of his success. And he will be under some pressure, particularly going into the midterm elections next year, from Republicans who want to keep their seats in Congress.
“So at some point, I think he’ll go back to the normal Donald Trump and will get more agitated about sharemarkets, it’s just that we’re not there yet. Still too early for that.”
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