The last day of the quarter ended with a bit of a whimper, investors will probably hope the lack lustre performance of the past three months will be replaced by a more traditional Christmas rally. Any gains made in August have been mostly wiped out as the once again September proved a curse for equity markets. As we start the new quarter investors will once again be focussing on the actions of the ECB and the Federal Reserve.
On Thursday the ECB meet to announce their latest rate decision, no change to last month is expected, what is expected is more detail on the asset purchase program to meet the ECB's target to expand the balance sheet by one trillion euros. The economic data from the region ahead of the meeting on Thursday continues to show inflation rates close to zero, unemployment rates remaining stubbornly high, and bond yields at record lows.
We often quote Merrill Lynch surveys in this blog as they do a lot of proprietary work on investor positioning and asset performance. One of their latest reports involves a topic called bunkers and boosters. Bunkers are defensive stocks, those less correlated to the economy, and boosters are stocks of a more cyclical nature. On a global basis the performance of boosters has been deteriorating over the past year, despite a recovering global economy, conversely the performance of bunkers has been picking up.
When one compares the performance of bunkers and boosters in Europe and the US, there is a clear divergence reflecting the performance of the two equity markets. The US boosters have outperformed the bunkers by over 20pct in the past year, where as in Europe the bunkers have outperformed the boosters by about 7%.
Despite the change in the two regions monetary policies, as the Fed looks to tighten monetary policy and the ECB looks to loosen, so far there has been no material change in the past few months from the performance of boosters and bunkers in the two regions.
Equity markets have performed over the past five years in a period of low economic growth, low inflation and low interest rates. Part of that performance has been a rerating on stocks valuation, and that’s probably over. Aside from that the three fundamentals appear to be continuing for a period of time to come. As we enter the final quarter one could conclude on that basis equities should remain resilient geopolitical worries aside.