- 2018 has been proven to be a tough investment environment for investors around the world, especially in emerging markets.
- Of all the major assets JP Morgan tracks, just 20% are currently higher than they were at the start of the year, the lowest proportion outside a period of economic or financial shock ever seen before.
- Economists at the bank “do not see a deeper message in this month’s market stress”.
2018 has been a tough investment environment for investors around the world.
After some jaw-dropping gains in asset classes further out the risk spectrum in January, those moves have been now been unwound and then some, starting in emerging markets before moving into mature markets in recent months.
As seen in the chart below from JP Morgan, just over a handful of major asset classes tracked by the bank now sit in positive territory for the year, predominantly reflecting gains in US markets which have also given back much of their gains thanks to the abrupt and large selloff seen in US stocks since the start of October.
The US dollar and cash are among the outperformers, underlining just how stark 2018 has been in comparison to the mammoth gains seen in riskier assets last year, especially in emerging markets.
As indicated by the large red bars at the bottom of the chart, those once high-flying asset markets have fallen with a thud this year, dominating the list of worst performers.
“Three explanations for this misery are that the global economy and earnings have reached a major turning point, the Fed is committing a familiar policy mistake and investors now overreact to even modest changes in the late-cycle environment, having failed to anticipate the GFC,” JP Morgan says.
Of the three factors that have been widely cited as catalysts behind the recent market turmoil, the bank says its the latter, an overreaction from markets, that largely explains what’s been seen in recent months.
“Does the endgame need to be priced now?,” it asks. “If not, 2018 looks like the year of overreaction.”
“The risk has always been that markets would turn earlier, because investors’ mindset has changed this cycle.
“If complacency is one of the words most associated with the pre-Lehman years… then paranoia may be the one most tied to what remains of this cycle.”
JP Morgan says this preemptive pricing in of a worst-case scenario could deliver an outcome never seen before outside periods of financial or economic turmoil.
“This month’s slide in global equities is starting to deliver several other dubious distinctions across asset classes,” it says.
“The percentage of asset classes that has generated positive returns this year is only 20%, a share that has never been so low outside of 1970s stagflation episodes and the Global Financial Crisis.”
An unprecedented level of underperformance outside of a major economic or financial shock, in other words.
While recent market moves clearly suggest some unease about what the future holds for the global economy, JP Morgan doesn’t believe the short-to-medium term outlook is sinister.
“Our economists do not see a deeper message in this month’s market stress,” it says.
“They remain comfortable with core calls for slightly above-trend global growth, comprising a US that slows but remains well above trend, China that stabilises on stimulus and Japan that normalizes from natural disasters. The Euro area remains the chief concern, with growth of 1.6% tracking a full point below the forecast. We still think noise will fade and the region lift.”
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