The overarching influence on nearly all global finance in the month of October was the culminating of the 18 month reality TV show known as the 2016 US Presidential Election campaign. Pro-Clinton investment markets nervously bit their fingernails as Team Trump somehow managed to gain lost ground despite an unending series of faux pas. Markets then uttered a collective “gulp!” when the F.B.I. announced yet another email investigation on the very last trading day of the month.
This nervousness translated into a drag on the majority of indices. US stocks went down 2% in October on average with (risk-on) small caps copping the brunt of it. European large caps and emerging markets tripped a little less, and Asian equities were on the higher end of regional falls, down 2.6%. Japan however bucked this trend to go up nearly 6%. A weakening yen is very likely making this export-heavy nation, attractive again to investors.
And how’s this for absolutely not getting the election memo….an ETF tracking the top 40 Latin American large cap companies returned 10.8% in October! This same investment is also up nearly 50% for the year! Either these guys must have inside dibs on the result of the U.S. election or at the very least Trump must be proposing to utilise Mexican companies to build THAT wall. Fueled by the snap back in commodity prices, ala BHP rising 80% from its February wallow, commodity rich regions such as Latin America have been a surprise stabilizer for markets during a year filled with volatile geopolitical events and uncertainty.
October was indeed another volatility fest for commodity prices as crude oil went nuts (again!!) to clip a year to date high only to lose 10% of that and close in the red for the month. If the price movements are anything to go by, everybody seems to think they know where oil is going yet no one has a clue. You read that right.
Safe haven gold’s appeal diminished in October breaking down the important support price level of $1,300/troy ounce. Firming Federal Reserve rate hike speculation, translating into a rising USD dollar index (now at its highest point in 6 months), pressured metals and commodities in general.
The ASX 200 finished a bit over 2% in the red. Save for the materials sector - no doubt the beneficiary of rising iron ore and coal prices in October – there were no other winners in a month of market trepidation as other sectors either matched the ASX’s general underperformance or lagged it. But beneath those sombre headlines, there was actually a bit of cheer by way of G.D.P continuing to accelerate, a better than expected rise in retail sales and a narrowing trade deficit. September quarter’s inflation reading also came in hotter than expected (and higher than June’s) though still short of the RBA’s magic 2%.
The 45th United States Presidential Election on November 8th. That’s it really.
What was once a shoo in for the investment establishment friendly Democratic party is now tightening up in a way that would be a cause for their serious concern, especially after the F.B.I. chucking its spanner into the election engine. And the closer the race gets, the more likely markets will continue to back away as the possibility of a Donald Trump win starts to loom. Financial markets love certainty and a Trump possibility would seem to represent everything but.
Whilst the Private Wealth team are certainly no experts in any form of politics, we have been cautiously awaiting this period during the 2016 year, with portfolios braced on strong diversification and new investment positions holding heightened levels of cash in anticipation of a potential short term investment window. Whatever the election result, the end of the world is not on our radar. More to come on this, next month.
The short term performance of small caps and the Asian region has been a drag on portfolios, however it should be noted that these particular allocations have been some of our biggest drivers of growth over the past 10 years. “Rome wasn’t built in a day” and truer words cannot be spoken when it comes to investing.
Why does a share’s price fall after a dividend is booked to be paid (i.e. “ex-dividend”)?
Many a local investor is familiar with the phenomenon of a big bank allocating a dividend and its stock trading in the red for the rest day, in most cases by the amount of the dividend paid. When a dividend is paid, a portion of the company's value is being transferred from the company's bank account to the accounts of investors. That draw down in value is to be expected because paying a dividend reduces the value of a company's assets (i.e. it’s hard earned cash).
Some investors might feel slighted when a stock falls on its ex-dividend date, but they shouldn't. The stock price is merely adjusting the fact that some of the company's value has been transferred directly to shareholders. The value of investors' total ownership - the value of the stock plus the value of the dividend - is unchanged. For savvy investors and fund managers, these periods of heightened volatility often provide a value adding trading opportunity.