Are investors in for a trick or a treat this Q4?

Halloween

In the build-up to the most frightening night of the year, Halloween, ETF Stream asked three fund buyers whether they are positioning their portfolios for a trick or a treat as we head towards the end of the year.

For some, Q4 is the most exciting time of the year as we run-up to Christmas with a fresh chill in the air, nights getting darker and investors cashing in on some positive performances in the previous quarters.

But before people can get jolly, Halloween is upon us and can offer more than just a fright to trick or treaters. Halloween last year left investors horrified as 12 months of gains were wiped out in one quarter, resulting in haunting negative returns for the year. But unlike Michael Myers, will this be the last volatile Q4 we see?

Between Halloween and Christmas last year, the S&P 500 and FTSE 100 fell 13.3% and 5.5%, respectively. This howling period of volatility left investors spooked before markets rebounded.

The first three quarters of 2019 have seen new highs for the S&P 500 index which has climbed 21% over the past ten months as well as the FTSE 100 climbing a modest 8.5% over the same period.

While 2018 offered a poor Q4 in terms of performance, Nutmeg is trying to remain optimistic post-Halloween as November and December are often the best periods for equity markets. The first 10 months of 2019 has been significantly positive for the company with gold, oil and the US dollar all up for the year.

Pacome Breton, director of investment risk at Nutmeg, said: “We have had a great first ten months in 2019 – one of the best over the last twenty years in fact for multi-asset allocation combining world equity and long-term bonds.”

While the last 10 months have been favourable for investors, Breton is concerned that the coming months might not be so kind.

“Following the alignment of stars we’ve seen so far, what spooks me right now is whether we could begin to see a reversal,” said Breton. “Could the next ten months be the opposite of what we have seen in the last ten?”

Halloween this year was also supposed to share the day with the UK leaving the European Union, but a further extension to Brexit by Prime Minister Boris Johnson leaves European investors in political uncertainty.

Additionally, a global trade war has driven investors to seek haven in low-risk exposures such a fixed income and gold which have both seen a large volume of inflows and rallying performances as well.

Dan Kemp, CIO, EMEA, at Morningstar Investment Management, said: “Despite trade wars, scandals and the overarching pall cast by Brexit, prices of both equities and bonds have continued marching upwards as investors appear torn between their confidence in the growth of high-quality companies and concern over the global economy.”

“While there is always a temptation to panic when confronted by the strange and unfamiliar, it is essential that investors keep their head and investigate these rather spooky markets when looking for attractive opportunities.”

Outside of geopolitical events, the property market is another area worth keeping an eye on, according to AJ Bell.

Simon Molica, fund manager at AJ Bell, commented: “With property yields having fallen to historic lows it may be that the UK commercial property market has now moved into haunted territory.

“The current property cycle has been rather ‘long in the tooth’, spurred on by a low interest rate cycle fuelling cheap debt on the domestic front and a weakened currency position to garner the interest of international buyers.

“With property yields at these levels, the risk/return characteristics of the asset class appear pretty unfavourable in our opinion, and that’s before even mentioning the word ‘liquidity’.”

Molica said the property market as a whole isn’t equal, as the biggest area of concern is around high street retail and London offices.

“The London office market may come under pressure in the future from a combination of strong supply, as the London skyline has been dominated by cranes, and through lower demand, as advancements in technology allow for companies to reduce floor space further,” Molica continued.

While investors remain cautious of a potential repeat of 2018, October 2019 has managed to avoid a twin-like performance of the previous year, but that doesn’t mean we are out of hot water.

“Keep your wits about you and remember that the point in the movie when you think you can relax normally comes just before the greatest shock,” Kemp warned.

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