Tuesday, October 4, 2016

Sector, style, country and bond analysis consistent with risk-on behavior

Some have been thinking that equity markets are running on empty with an economy that cannot generate significant growth, but a review of sector, style, country and bond returns for the month show a market where investors are still willing to take risks. There is a clear focus on risk-on assets at the expense of rate sensitive sectors. The key fourth quarter question is whether this will continue in an environment that suggests the Fed is ready to act.

In the style sectors, September returns were strongest in the emerging markets while money seemed to be pulled from dividend yielding stocks. The sector that showed the weakest potential performance based on moving averages and past momentum was dividend yielding equities. Albeit no action from the Fed, there is the belief that rates may be headed higher even if there are still risk opportunities available. The push pull is between whether a higher discount rate will have more impact than a possible upturn in the economy. 

The major sector analysis confirms the move out from higher yielding equities. Utilities and real estate shows the weakest moving averages. Finance and real estate were the weakest sectors for the month. With the growing problems of Deutsche Bank, there has been a closer look at all names in the finance sector. Energy stocks made a significant comeback with the rise in oil prices. Technology continues to be a strong performer for the year.

Country risk shows weak performance for Mexico, the nation most likely to be affected by a trade war. Similar to the swings in the peso, switches in US presidential election probabilities will drive this market. Weaker EU countries are also an investor concern. There continues to be have and have-not countries in the EU. Asian markets have shown stronger performance in spite of trade issues and growing geopolitical risks with China.

The bond showed better performance in the riskier credit and non-dollar sectors. This is consistent with the risk-taking behavior in the equity markets. There seems to be greater caution at taking on more duration risk at this time.

No comments: