Market Update - 6/02/2018

Markets globally have been roiled by large moves in recent days. These moves appear to be the unwinding of volatility based strategies that have become popular after years of low and declining volatility. The longer markets have remained stable, the more money has been sucked into products that require markets to remain stable in order to make money.

Such strategies have benefited as volatility in markets fell, but have been forced to close positions as volatility rose in recent days. Selling appears to have been driven by algorithmic, quantitative trading not traditional, buy-and-hold mutual funds. Most dealers were quiet and there was little to no panic on trading desks. Other equity markets have sold off in sympathy, but usually not to the degree of US markets. Japan is the exception – it has also sold off sharply. This makes sense as Japan is a very quant-driven market with few fundamental investors relative to market size.

The background condition that allows for such steep moves is that some large equity markets are expensive, especially in the US, and interest rates are rising. As a result global markets may have put in a significant high for the moment.

Underlying economic growth remains strong in most of the world economy – it is precisely this that is helping drive interest rates higher. We think current equity market movements are unlikely to disrupt this significantly.

We have little money in the most affected markets in the US and our portfolios represent good value. While share prices of our holdings may fall, any significant setbacks will represent good buying opportunities.

 

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