Equity Monthly: Red October doesn't signal a slump
Head of Equity Strategy
Summary: Last month was brutal for equities with leading indices suffering big losses. But while a gentle recovery now beckons, major risks are looming on the horizon.
The market clearly went on a hunt for Red October last month with equities down 7.3% having been down by as much as 9.5% on October 29. This makes it the worst month for global equities since May 2012. Risk parity funds also had an ugly October with AQR's risk parity fund down 4.9% as fixed income did not provide shelter for the havoc in equities; the fund is down 6% year-to-date which will end up making 2018 one of the worst asset allocation years since WWII. What can we expect from here? Is this the beginning of a major decline in global equities?
The decline in global equities have taken US equity valuation down a whole half-standard deviation from around 1.0 to 0.5 making their expected return (see chart) more compelling again.
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Outrageous Predictions 2023: The War Economy
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French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.