Blog Posts — November 5, 2018

October Brings Market Shock

Equity markets sold off by the most in six years in October, amid investor concerns that rising bond yields and a slowdown in China will stymie global growth.

The STOXX® Global 1800 Index tumbled 7.4% in dollar terms1 in the month, reversing three months of gains. It was the benchmark’s worst monthly performance in over six years, and its weakest October since the global financial crisis broke out in 2008. The Global 1800 Index is now 9% below its January high.

The pan-European STOXX® Europe 600 Index and the Eurozone’s EURO STOXX 50® Index retreated more than 5% when measured in euros. The latter has now fallen 11% from a high in November last year.

The STOXX® North America 600 Index declined 7% in dollar terms as some investors took profits from a region that has performed strongly in the past year. The STOXX® USA 900 Index lost 7.1%, its first decline in seven months, even as the US government reported annual growth of 3.5% in gross domestic product (GDP) for the third quarter.

The STOXX® Asia/Pacific 600 Index tumbled 8.7% in the month, in dollars. The STOXX® Emerging Markets 1500 Index dropped 7.9%, its fifth retreat in six months.

Investors face headwinds

While data now suggest the US economy may this year post its fastest growth since 2005, investors have had to face headwinds in the form of a trade conflict between the US and partners, rising interest rates and a slowdown in other regions. Yields on 10-year US Treasuries topped 3.2% in October for the first time since 2011.

China reported on Oct. 19 that its economy grew an annualized 6.5% in the third quarter, less than economists had forecast and the weakest pace since the first quarter of 2009.2 The STOXX® China A 900 Index dropped 8.5% in the month, in yuan, and lost 9.7% in dollars.

In Europe, releases confirmed the loss in economic momentum relative to 2017. The European Union on Oct. 30 reported that the Eurozone’s GDP expanded at an annual 0.6% in the third quarter, down from 1.8% in the previous three months. That was the weakest quarterly rate in five years. A few days earlier IHS Markit reported that its gauge of business activity in the Eurozone slowed in October to the lowest in 25 months.3

No refuge from the broad sell-off

The severity of October’s retreat means many equity indices now need to rebound strongly in the year’s last two months to avoid a loss for 2018. The EURO STOXX 50 is headed for its first annual decline since 2011, having dropped 6.5% so far this year. The STOXX China A 900 has plunged 23% this year, poised for its worst performance since 2008.

While all 19 supersectors in the Global 1800 Index recorded losses in October, the STOXX® Global 1800 Construction & Materials Index fared the worst after declining 11% in dollars. The STOXX® Global 1800 Retail Index dropped 10.5% and the STOXX® Global 1800 Chemicals Index fell 10.3%.

At the other end, the STOXX® Global 1800 Utilities Index posted the best performance with a 0.8% decline. It was followed by gauges for media and food & beverage.

On a country basis, no market escaped the sell-off either. The STOXX® Switzerland Total Market Index scored the smallest loss among 23 developed markets tracked by STOXX, falling 1.4% in local currencies. The STOXX® Israel Total Market Index and the STOXX® Spain Total Market Index came in second- and third-place, respectively, losing 4.1% and 4.9%.

It was the STOXX® Luxembourg Total Market Index which posted the worst monthly performance, shedding 13%. The STOXX® Japan Total Market Index registered the second-worst performance after falling 9.2%. The STOXX® Italy Total Market Index followed with an 8.4% retreat.

Themes, factors, volatility

STOXX’s revenue-based thematic indices underperformed, paced by those exposed to concepts such as digitalization and healthcare that have had strong momentum in the past year.

The iSTOXX® FactSet Breakthrough Healthcare Index led the retreat after coming up on top in September, falling 14.1% in dollars in October from a record high. The STOXX® Global Fintech Index, on the other hand, fell the least. On a one-year basis, four of the revenue-based thematic indices have strongly outperformed the Global 1800 Index, while four have lagged behind.

Among STOXX’s AI-driven thematic indices, the iSTOXX® Yewno Developed Markets Blockchain Index stood out over the month as it outperformed the Global 1800 Index by 260 basis points. The index is now up 9.3% in the past year, compared with a 0.7% gain for the Global 1800 Index.

All seven iSTOXX® Europe Factor Market Neutral Indices, which hold a short position in futures on the STOXX Europe 600, helped investors neutralize systematic risk and focus on pure factor investing. The gauges for value and low risk provided the best relative returns.

Minimum variance strategies also proved their edge in October, outperforming in all regions. The STOXX® Global 1800 Minimum Variance Index fell 4.5% and its unconstrained version retreated 4.3%. That compares with the 7.4% retreat for the benchmark STOXX Global 1800.

Featured indices

Total returns after taxes.
CNBC, ‘China reports economic growth below expectations – its worst pace since the financial crisis,’ Oct. 18, 2018. 
IHS Markit, IHS Markit Flash Eurozone PMI release, oct. 24, 2018.