Choose Language
August 14, 2024
NewsTaking stock on the recent market sell-off
Following the market meltdown that occurred at the beginning of August, we wanted to provide a recap of events for our clients and outline how we approached the situation.
What happened?
The turmoil originated in Japanese markets. With the yen continuing its rebound against the dollar, reaching around 13% of its July low, Japanese equities underwent a significant and ferocious correction. The currency's sharp appreciation did not only affect the domestic stock market, but it rattled global markets, as it upset countless investment strategies based on the Yen carry trade [1]. The acceleration of movements continued to take investors by surprise, hurting everyone from small stock and currency traders to large hedge funds and institutions. Investors essentially judged that the Bank of Japan had made a historic policy mistake after it surprised the markets with the level of firmness with which it raised rates on July 31.
Across the Atlantic, developments in the US economy added to fears. Until recently, incoming data suggested that the so-called soft landing scenario was playing out. Inflation appeared to be cooling while activity was holding up. However, a weak nonfarm payrolls report coupled with a bleak ISM manufacturing PMI, lathered up fears that the Fed might be behind the curve and the US economy could be heading for recession.
What's more, some booming stocks ran out of steam because while company earnings were good, they were not good enough to overcome the high hurdle set by expectations. Investors began to question how and when companies will monetise huge investments in AI.
Low summer liquidity also exacerbated market movements.
Our investment strategy
- We entered this storm with an underweight position in Japanese equities, having reduced exposure mid-July following a 23% rally over 2024.
- In July, we had also reduced portfolio risk by cutting high-yield bond exposure and reinvesting the proceeds in Treasuries.
Our balanced allocation between equities and bonds, which favours quality over risk, meant that we were not overly affected by the market decline, although it did not prevent us from giving up some of the returns generated in the previous quarter.
On August 6th, we decided to use the sell-off as an opportunity to add further equity exposure in the High risk profile, bringing the overall weight to 90% (achieved by increasing US and European exposure by 3.5% each).
Why did we decide to add equities?
Markets reacted strongly to recent US macro data and fears of an imminent recession were heightened. These fears appear to be misplaced. The rise in unemployment in July was largely attributed to an increase in labour supply, as reflected in the higher participation rate. The report also showed a significant number of temporary layoffs, which could potentially be reversed in the coming months, keeping the employment-to-population ratio stable, especially for prime-age workers.
While we believe economic growth is likely to slow, it is unlikely to contract sharply as fundamentals and corporate balance sheets remain resilient. In our view, the market reaction was overdone, exacerbated by the usual summer liquidity squeeze and the impact of the yen-funded carry trade.
We expected the market to normalize, although volatility is likely to remain. Indeed, since the trough, the S&P 500 has rallied by over 4% and the Topix by over 14%.
The Fed is expected to start cutting rates in September, equity valuations have come down significantly, and corporate earnings remain resilient. This combination should support equity markets in the last part of the year if our macro scenario is correct.
We stick to our mantra of staying invested for the long-term, not being afraid of short-term volatility and focusing on macro and micro fundamentals.
[1] The carry trade is a financial strategy where investors borrow Yen, which typically has a low-interest rate, and then use it to buy assets in US dollars or other currencies offering higher yields.
Data as of 13/8/24
Disclaimer
All financial data and/or economic information released by this Publication (the “Publication”); (the “Data” or the “Financial data
and/or economic information”), are provided for information purposes only,
without warranty of any kind, including without limitation the warranties of merchantability, fitness for a particular
purpose or warranties and non-infringement of any patent, intellectual property or proprietary rights of any party, and
are not intended for trading purposes. Banque Internationale à Luxembourg SA (the “Bank”) does not guarantee expressly or
impliedly, the sequence, accuracy, adequacy, legality, completeness, reliability, usefulness or timeless of any Data.
All Financial data and/or economic information provided may be delayed or may contain errors or be incomplete.
This disclaimer applies to both isolated and aggregate uses of the Data. All Data is provided on an “as is” basis. None of
the Financial data and/or economic information contained on this Publication constitutes a solicitation, offer, opinion, or
recommendation, a guarantee of results, nor a solicitation by the Bank of an offer to buy or sell any security, products and
services mentioned into it or to make investments. Moreover, none of the Financial data and/or economic information contained on
this Publication provides legal, tax accounting, financial or investment advice or services regarding the profitability or
suitability of any security or investment. This Publication has not been prepared with the aim to take an investor’s particular investment objectives,
financial position or needs into account. It is up to the investor himself to consider whether the Data contained herein this
Publication is appropriate to his needs, financial position and objectives or to seek professional independent advice before making
an investment decision based upon the Data. No investment decision whatsoever may result from solely reading this document. In order
to read and understand the Financial data and/or economic information included in this document, you will need to have knowledge and
experience of financial markets. If this is not the case, please contact your relationship manager. This Publication is prepared by
the Bank and is based on data available to the public and upon information from sources believed to be reliable and accurate, taken from
stock exchanges and third parties. The Bank, including its parent,- subsidiary or affiliate entities, agents, directors, officers,
employees, representatives or suppliers, shall not, directly or indirectly, be liable, in any way, for any: inaccuracies or errors
in or omissions from the Financial data and/or economic information, including but not limited to financial data regardless of the
cause of such or for any investment decision made, action taken, or action not taken of whatever nature in reliance upon any Data
provided herein, nor for any loss or damage, direct or indirect, special or consequential, arising from any use of this Publication
or of its content. This Publication is only valid at the moment of its editing, unless otherwise specified. All Financial data and/or
economic information contained herein can also quickly become out-of- date. All Data is subject to change without notice and may not be
incorporated in any new version of this Publication. The Bank has no obligation to update this Publication upon the availability of new data,
the occurrence of new events and/or other evolutions. Before making an investment decision, the investor must read carefully the terms and
conditions of the documentation relating to the specific products or services. Past performance is no guarantee of future performance.
Products or services described in this Publication may not be available in all countries and may be subject to restrictions in some persons
or in some countries. No part of this Publication may be reproduced, distributed, modified, linked to or used for any public or commercial
purpose without the prior written consent of the Bank. In any case, all Financial data and/or economic information provided on this Publication
are not intended for use by, or distribution to, any person or entity in any jurisdiction or country where such use or distribution would be
contrary to law and/or regulation. If you have obtained this Publication from a source other than the Bank website, be aware that electronic
documentation can be altered subsequent to original distribution.
As economic conditions are subject to change, the information and opinions presented in this outlook are current only as of the date
indicated in the matrix or the publication date. This publication is based on data available to the public and upon information that is
considered as reliable. Even if particular attention has been paid to its content, no guarantee, warranty or representation is given to the
accuracy or completeness thereof. Banque Internationale à Luxembourg cannot be held liable or responsible with respect to the information
expressed herein. This document has been prepared only for information purposes and does not constitute an offer or invitation to make investments.
It is up to investors themselves to consider whether the information contained herein is appropriate to their needs and objectives or to seek advice
before making an investment decision based upon this information. Banque Internationale à Luxembourg accepts no liability whatsoever for any investment
decisions of whatever nature by the user of this publication, which are in any way based on this publication, nor for any loss or damage arising
from any use of this publication or its content. This publication, prepared by Banque Internationale à Luxembourg (BIL), may not be copied or
duplicated in any form whatsoever or redistributed without the prior written consent of BIL 69, route d’Esch ı L-2953 Luxembourg ı
RCS Luxembourg B-6307 ı Tel. +352 4590 6699 ı www.bil.com.
Read more
More
December 9, 2024
Weekly InsightsWeekly Investment Insights
December is here, and while the cold, dark days may not be everyone's cup of cocoa, the festive spirit is starting to set in....
December 2, 2024
Weekly InsightsWeekly Investment Insights
In an age where you can carry a computer, music player, phone, TV, camera, calculator and notebook all in one small device that fits...
November 25, 2024
Weekly InsightsWeekly Investment Insights
After last week's disappointing Eurozone economic data, another ECB rate cut in December is high on the wish list for Europe, with investors increasing...
November 22, 2024
BILBoardBILBoard December 2024 – Red Sweep
At BIL, we are long-term investors guided by stable, strategic asset allocation guidelines. However, our investment strategy itself is a living, breathing thing,...
November 18, 2024
Weekly InsightsWeekly Investment Insights
Less than two weeks after the US Presidential election, Trump has made significant progress in nominations for top government posts, leading to some market...