There is a “narrow window” for investors to reposition their portfolios ahead of an anticipated rally into the year-end, according to BlueBay’s Anthony Kettle, who said many investors are now in “wait-and-see mode” in the run-up to the US Election.
Senior portfolio manager Kettle said markets are becoming increasingly nervous, which has led to risk aversion. This can be shown through "a tough week" for equities this week, with European and emerging market indices down by more than 4%, and the S&P 500 having fallen 63 basis points. In total, the S&P 500 has suffered month-to-date losses of 5.77%.
Kettle believes there are two factors exacerbating market fears: the "continued impasse on the fiscal side" in the US, and the "growing realisation the US Federal Reserve is struggling to form a clear consensus" on how to implement its inflation-targeting framework.
"It has been a difficult month for risk markets, as lofty valuations have combined with a lack of positive catalysts to fuel a bout of de-risking across both equities and credit," he explained. "In our opinion, factors weighing on the negative side have included a lack of further fiscal and monetary stimulus in the US, along with concerns around the US Elections in early November.
"It seems unlikely that we see much change in this narrative in October. Investors seem particularly concerned around the threat of a contested election, whereby there is no clear winner and no candidate accepts defeat. We believe this would mean choppy trading conditions in October without a clear market direction."
Market nerves have been less prevalent in "muted" core-rates markets, according to the manager, who pointed out that despite the geopolitical headwinds on the horizon, 10-yr US Treasury yields have only fallen by five basis points over the last month.
"We feel this presents a challenge for traditional portfolio construction," Kettle continued. "In [emerging markets], FX has been particularly weak in September, after performing well in August. As we head into October and November, we expect FX to remain the primary channel within EM to express views around the US Election.
"However, we believe the recent back-up has helped the symmetry of the trade, with current polling pointing towards a result that would actually benefit EM FX on the whole."
The manager added that, in credit markets, there was a significant compression between investment-grade and high-yield assets over the course of September. He pointed out that, while he believes "there is a case to be made" regarding valuations in the high-yield space, investors are unlikely to top up in these positions until the US Elections are over.
"This leaves an interesting set-up, in our opinion, with valuations meaningfully improved in both credit and local markets, but with many investors in ‘wait-and-see' mode until the US election," Kettle concluded. "We feel this will leave quite a narrow window to reposition portfolios for an anticipated rally into year-end."