Global investors limp into the fourth quarter of a volatile 2015 nursing the worst financial market returns since the credit bust and banking collapse of 2008 and with few hopes of making up ground before the end of the year.
Of 21 major financial benchmarks tracked by Reuters, only two are up so far this year as slowing growth – most worryingly in China – an emerging market crisis and prolonged uncertainty on when U.S. interest rates might rise have slammed markets around the world.
The exceptions – the U.S. dollar and 10-year U.S. Treasury bonds – have historically been seen as cash-like havens and have posted returns of 6.2 percent and 2.5 percent, respectively.
In the three months to September, they rose 0.4 percent and 3.0 percent, respectively, with U.S.-based government-Treasury funds drawing seven straight weeks of inflows totaling $10 billion, according to Lipper data ended Sept. 23.
Only German and Italian government bonds joined the dollar and Treasuries in positive territory during the quarter.
That leaves investors in a quandary: do they throw caution to the wind in the fourth quarter and attempt to claw back their losses? Or do they hunker down and ensure that the damage done in the previous three doesn’t get any worse?
Certainly, the investment backdrop got dramatically more challenging in the third quarter. The volatility in those three months accounts for most of the year-to-date damage investors have suffered, and in some cases all.
The biggest year-to-date declines have been in copper (-21 percent), emerging market equities (-18 percent) and Brent crude oil (-16 percent), the data show.
Billionaire U.S. activist investor Carl Icahn is convinced that a serious downturn is looming.
“I am more hedged than I have ever been,” Icahn told Reuters in an interview this week.
Equities had a lousy quarter, and not just in the emerging world. The S&P 500 had its worst three-month performance in four years and Japan’s Nikkei had its worst since the three months after Lehman Brothers collapsed in late 2008.
DOLLAR’S CROWN SLIPPING?
Investors in other markets suffered much bigger losses in the three months to Sept. 30. Chinese A shares listed in Shanghai plunged nearly 30 percent and Brent crude oil shed a quarter of its value.
Analysts have been falling over themselves in recent weeks to issue the most bearish outlook on commodities and emerging markets. Among the most notable was Goldman Sachs’s note earlier this month that oil could fall as low as $20 a barrel.
Such dramatic price swings often herald an imminent reversal. JP Morgan Asset Management’s strategists aren’t alone in retaining a positive outlook for the fourth quarter, arguing that investors have simply gotten too bearish.
“Given that we consider U.S. recession risk to be low, the returns offered by higher-quality high yield credit are now attractive relative to equity,” they wrote in a recent client note.
“We keep our optimism on the U.S. economic outlook and as such remain overweight developed market equities versus emerging markets, and overweight the U.S. dollar versus emerging market currencies,” they added.
The dollar was the best-performing asset of all in the third quarter, rising 6 percent against a basket of major counterparts on expectations the Fed will soon lift U.S. rates and as investors sought a safe port in the emerging market storm.
That is the tide the dollar doubter HSBC is swimming against, almost alone. This week, it issued even more bullish euro forecasts, calling for $1.14 at the end of this year from $1.05 previously, and $1.20 at the end of next from $1.10.
But anti-consensus calls that bold are few and far between, especially with Fed Chair Janet Yellen’s finger hovering over the rate hike trigger.
New York Fed President William Dudley said on Monday that rates will “probably” rise this year, perhaps as soon as October if the economy continues to improve. But “lift off” expectations have been consistently dashed for well over a year now.
“There is not enough global growth to go around and the Fed realizes it,” Jeffrey Gundlach, who oversees DoubleLine Capital, told Reuters.
“If we are talking about global GDP and you gave me an over and under number, I will always take the under number,” Gundlach said. The deteriorating global outlook will force the Fed to wait until next year, he said.
In its latest Global Financial Stability report published on Tuesday, the IMF warned that emerging market firms, which have amassed a record $18 trillion of debt, need careful monitoring as the era of record low interest rates nears its end.