Ouch-tober 2018

I have to take my hat off to Theresa May for her performance in October.  Dancing (well, jiving, at least).  On stage.  To kick off her make-or-break appearance at the Tory conference.  That lady has balls.

The big news this month has been foreign.  Alien, even, in the case of another lady with balls – Jodie Whittaker (“Why are you calling me Madam?”) breaking the Doctor’s glass ceiling.

We’ve had Saudi Arabia in the news for much of the month, for some gruesome reasons. We’ve had foreign governments getting a whipping in Germany or, Royal visit notwithstanding, losing their majority in Oz.  We’ve had the USA administration pulling out of a Russian nuclear arms treaty.

And of course, we’ve had the major geopolitical upheaval that is a new phone from the most important FAANG.

I suppose a quick recap of the worldwide developments would, on balance, suggest downward pressure on the markets.

I really don’t think however that Doctor Who, returning to Earth after a prolonged absence and reviewing  recent developments, would expect such a brutal, consistent month in the equity markets.  Everywhere.

October saw the biggest market drops since my monthly portfolio tracking began in January 2013.  In fact The Economist says October saw one of the top 10 biggest monthly falls in the S&P 500 since the 08/09 crisis.

The Sunday Times shows the worst months for FTSE since the 1960; October 18 isn’t one of the worst 10 but most of the worst ones were more than 30 years ago!

What was clear, as October drew on, was that everything seemed to be falling.  Asian markets have had a tough year already, largely due to Trump trade spats.  European equities have similarly faced trade headwinds.  But now the USA, Oz etc fell sharply too. The Sunday Times has a nice graph in fact:

 

Most noticeable for some of us was the big drop in tech stocks.  Some FAANGs had fallen 20% at points; only AAPL seemed relatively immune from the sharp change in sentiment.

Amidst the hysteria, you’d have been hard pushed to notice that bonds were relatively unaffected by this carnage.  UK corporate bonds actually went up almost half a percent.  For once, correlations didn’t all converge.

Currency movements deserve a brief mention too.  For UK investors October was another month of big Brexit-driven swings.  The pound rose against the USD above £1:$1.32 at one point, before falling to £1:$1.27 where it pretty much finished the month.  The dollar won the October currency battle, which took the edge off the S&P being the biggest casualty in the equity contest.

October saw the first possibility for ages that my ‘maximum drawdown’ would be breached.  A portfolio’s “drawdown” is the biggest drop it faces, from peak – i.e. the biggest loss it has ever suffered.  My biggest drawdown in almost six years is 7%, which happened in mid 2015.

With my equity markets falling over 6%, and my portfolio continuing to be leveraged by about one sixth (i.e. so every six point change should hit my portfolio by about seven points), the indicators weren’t looking good.

Fortunately for me, my portfolio weathered the October storms relatively well, dropping by “only” 5.2%.  My bond exposure has provided textbook diversification smoothing.  Obviously this correction isn’t over yet, but at this point I remain up over 3% from a year ago,

What has been your reaction to the sea of red numbers?

I was pleased to find myself remaining relatively calm.  With Asian and European markets falling significantly, I remained significantly underweight in my “International” markets, and continued to rebalance towards them.

I also found myself ‘buying dips’ in particular equities.  WARNING: do not try this at home.  The principle of rebalancing portfolios does not, in my experience, apply very effectively to individual stocks; a relative drop in one stock is usually a sign of a Dog rather than a tempting buying opportunity.  Nonetheless, five stocks’ low prices tempted me this month:

• BT.  BT announced a new CEO this month.  Their price has really bombed over the last few years, so they are offering a reasonably well covered 6.5% dividend yield.  I have a tiny legacy holding but felt I would buy up a bit more.
• WPP.  WPP’s has staggered from bad to worse post Sir Martin Sorrell.  As yet I don’t see any particular reason to buy in, and I worry that WPP represents the totemic example of a model which is being rendered obselete by Google and Facebook. For now, I’m on the sidelines.
• Andrew Sykes.  This small cap climate control (heating/air-con) stock is one I’ve held for a while, since learning about it via Maynard Paton.  Though it has remains much higher than my Cost price, it has dropped 25% recently. I don’t see any particular reason for this drop and have topped up.
• XRO. Xero, the New Zealand accounting software business, dropped about 20% in the general Tech downdraft.  I don’t see Xero’s customer momentum being affected by any of October’s news.  I think this is a buying opportunity and have topped up.
• AMZN.  Amazon briefly dropped to $1500 a week or two ago, down almost 30% from peak.  This has tempted me.  However Amazon remains a large holding for me, I struggle to work out a fair ‘in price’, and I’m still overweight in USA equities, so I haven’t bought any more.  I will probably set a limit order around $1500 and see what happens.

Amidst these uncertain times, one thing’s for sure: the markets are much more interesting than they have been for ages.  Any other opportunities tempting you?  Do tell, via comments below.