Global equities were broadly weaker over the week as the US reporting season progressed and nervousness around trade and rising yields appeared to resonate amongst investors.
Gains for the year in both the S&P 500 and Dow Jones were erased as mixed earnings results and weak housing data caused a wide sell-off.
The reporting season so far has been positive for technology with Paypal, Microsoft and Twitter posting solid results and outlooks.
Of note, particular weakness was seen in the results of microchip makers with the likes of Advanced Micro Devices, Texas Instruments and Nvidia falling significantly as the market reassessed their excessive growth expectations.
Concern is still apparent in Italy as Moody’s downgraded their sovereign debt rating just above junk bond status and the ECB rejected their 2019 fiscal plan, meaning they must revert back within the next three weeks with amendments to their plan.
In times of such drastic market movements, this reminds us of the importance of asset allocation and diversification in portfolios.
Domestically, our market was not spared from the sell off with the S&P ASX 200 trading lower over the week.
The market has now erased its yearly gains and now rests around 3.4 per cent lower over the year.
CBA announced to the market a sale of its 80pc interest in Indonesian Life Insurance Business (PT Commonwealth Life – PTCL) to Hong Kong based private company, FWD Group, for $426 million.
The transaction is expected to complete in the first half of calendar year 2019, subject to regulatory approvals in Indonesia, and is estimated to result in a post-tax gain of around $140 million.
We see the above transaction as a positive for the group as they continue to divest their non-core assets and allow management to refocus on its core banking businesses. One of our preferred names, Resmed (RMD) delivered a strong result for 1Q19 coming in ahead of expectations.
RMD continued to gain market share in the devices and masks space, increasing revenue by 12pc to $588m (1.5pc ahead of consensus) and net income increasing 23pc to $116m (2.9pc ahead of consensus).
We note although the fundamentals and market positioning for RMD remains sound, we are wary of its lofty valuation at this time trading at a PE of around 51x.
In light of the recent market volatility, the question may arise – where to from here? In the short term we would expect that this volatility persists. There is no real fundamental catalyst that has driven the falls over October.
What is also unclear is determining what the catalyst will be to break this lack of confidence. The macroeconomic outlook remains strong.
Valuations have pulled back (price-earnings ratio of the US equity market is now around 15.8 times) and US corporate share buybacks and dividend payments are expected to pick up by mid-November, as the earnings blackout periods come to an end, allowing US companies to resume buying back their stock.
In times of such drastic market movements, this reminds us of the importance of asset allocation and diversification in portfolios. Market corrections such as these can be healthy and present opportunities. We remain cautious to any fundamental changes in market and economic conditions.
- This article does not take into account the investment objectives, financial situation or particular needs of any particular person. Accordingly, before acting on any advice contained in this article, you should assess whether it is appropriate in light of your own financial circumstances or contact your financial adviser. Christopher Hindmarsh is an adviser at JBWere Limited. JBWere Limited is owned by National Australia Bank Limited.