End of a turbulent first half

Thought of the day

by Chief Investment Office 03 Jul 2018

Most equity investors are unlikely to look back on the first half of 2018 with great fondness. Global stocks returned just 0.8%, with plenty of volatility along the way. In the first half, the ratio of annualized returns relative to their annualized volatility was just 0.22, compared with 0.82 for the period since 2010. The risk-return trade off looked particularly poor when compared with 2017 when the MSCI All Country World returned 19%, with no drawdown of more than 2%.

We don't expect volatility to subside significantly in the second half of the year. Worries over global trade tensions, the trajectory of central bank tightening and Chinese deleveraging will keep investors on their toes. But we believe that investors should fortify their portfolios against turbulence rather than retreating from equity markets.

  • Economic and earnings fundamentals remain strong. Growth has been especially resilient in the US, the world's largest economy, which is on track for a growth rate of close to 4% annualized in the second half. We expect 15% growth in earnings per share for the MSCI AC World for 2018.
  • Our base case remains that cooler heads will prevail and trade tensions will not become a major headwind for growth, allowing investors to focus on fundamentals. But there is no room for complacency and we will be closely following the Purchasing Managers' surveys and job opening data for signs that companies are slowing investment in response to policy uncertainty.

So the balance of risks right now still supports a risk-on stance, in our view, including an overweight in global equities. However, investors should consider mitigating higher volatility though global diversification and by holding some counter-cyclical positions, such as 10-year US Treasuries.

Read more on preparing for choppier markets in our report: Volatility is back. Are you prepared?

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