As we highlighted in our live presentation two days ago we would favour being tactically long equities (global) if the Fed could deliver, which they didn’t, and China would announce another round of stimulus. The Chinese government may soon come to the rescue as the CSI 300 Index futures broke down today to new lows for the year and cycle, adding further pressure. The stabilisation phase in global equities could come soon from China and then if things go smoothly Fed governors will increase their dovish language in speeches during January.
Even when equity markets are quiet things can go wrong
We believe few investors understand the actual risks they are taking in equities. 2017 was the ultimate year of compressed volatility in equities. In these times, and especially a long bull market, investors can be lulled to sleep. But again running 50,000 simulations on historical returns from a starting point with very low VIX Index (first decile [9.1 – 11.9]) we get a large range in terminal cumulative returns after 63 trading days. When things are very calm investors should realise that there is a 5% probability that equities will decline by more than 6% (worst case 18.7%). In other words expect the unexpected when trading or investing in equities.