Vol-Agility: Agile investing in volatile times

• Market volatility in the third quarter was a reminder that nothing should be taken for granted in markets. There are lessons to be drawn from what we witnessed. Much should not have been surprising if market participants had considered the current context, rather than applying commonly-believed market rules.
• When the market turns, portfolio diversification, process flexibility and preparation, with a deep understanding of our investment universe, become essential ingredients.
• In the following pages, our Equities and Multi Asset investment teams have given some evidence of how the process works in action, talking about the steps they have taken, as the volatility of the third quarter ensued, to generate returns ahead.
• Looking ahead to 2025, US fixed income has the potential to start outperforming again in an environment where the Fed cuts rates in response to weaker US macroeconomic data, and with the backdrop of lower inflation. Such a scenario is probable, but by no means certain. It wouldn’t be the first time that the US economy has defied the odds.
• A market where macroeconomic conditions remain resilient and rates are declining would support equities.
• The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Wherever mentioned, past performance is not a guide to future performance.
• The views expressed in this document should not be taken as a recommendation, advice or forecast and they should not be considered as a recommendation to purchase or sell any particular security.

Drawing lessons from recent volatility

If we needed another reminder that nothing should be taken for granted in markets, we got one during the third quarter of 2024; weakening activity and labour data in the US over the summer, two assassination attempts on a presidential candidate, a last-minute change in the US Democratic Party’s nominee, an increase of the policy rate to 0.25% by the Bank of Japan (BOJ) – clearly signalling a change in direction from its ultra loose policy stance – and rate cuts by all three major developed market central banks, including a much discussed 50 basis point (bps) cut by the Federal Reserve (Fed). To close the quarter, China surprised with a set of coordinated stimulus measures reminiscent of Mario Draghi’s ‘’Whatever it takes” commitment during the 2012 Euro crisis when he was European Central Bank (ECB) President. And, at the time of writing, the conflict in the Middle East has meaningfully escalated.

Markets have responded with a significant increase in volatility. In Japan, we witnessed the biggest three-day equity drawdown in the market’s history. The short-lived volatility spike that ensued, was only exceeded on two occasions in the last 50 years – The Crash of 1987 and The Lehman Brothers’ Crash in 20081. The near unprecedented drop followed a de facto 15bps rate hike that had been fairly consistently flagged by the BOJ since December 2022, and the episode reversed almost as quickly as it happened. By the end of August, Japanese equities had recovered most of their losses in local currency, and were up in US dollar terms over the month2.

Elsewhere, during the July/August volatility, fixed income markets staged a period of outperformance versus equities, with correlation between the two squarely back in the negative camp. Equities experienced a technology-driven set-back, despite a relatively solid reporting season.

The function of the market reaction to the geopolitical events and macroeconomic datapoints was far from straightforward, and unlikely to be predicted based on commonly-accepted market “truths”. In the US, we saw a counter-intuitive reaction to the Fed’s 50bps rate cut, with the short end of the yield curve mostly unmoved, and a sell-off at the long end following the announcement. In equities, Value outperformed Growth, even as bond yields dropped materially3.

If we needed another reminder that nothing should be taken for granted in markets, we got one during the third quarter of 2024; weakening activity and labour data in the US over the summer, two assassination attempts on a presidential candidate, a last-minute change in the US Democratic Party’s nominee, an increase of the policy rate to 0.25% by the Bank of Japan (BOJ) – clearly signalling a change in direction from its ultra loose policy stance – and rate cuts by all three major developed market central banks, including a much discussed 50 basis point (bps) cut by the Federal Reserve (Fed). To close the quarter, China surprised with a set of coordinated stimulus measures reminiscent of Mario Draghi’s ‘’Whatever it takes” commitment during the 2012 Euro crisis when he was European Central Bank (ECB) President. And, at the time of writing, the conflict in the Middle East has meaningfully escalated.

Markets have responded with a significant increase in volatility. In Japan, we witnessed the biggest three-day equity drawdown in the market’s history. The short-lived volatility spike that ensued, was only exceeded on two occasions in the last 50 years – The Crash of 1987 and The Lehman Brothers’ Crash in 20081. The near unprecedented drop followed a de facto 15bps rate hike that had been fairly consistently flagged by the BOJ since December 2022, and the episode reversed almost as quickly as it happened. By the end of August, Japanese equities had recovered most of their losses in local currency, and were up in US dollar terms over the month2.

Elsewhere, during the July/August volatility, fixed income markets staged a period of outperformance versus equities, with correlation between the two squarely back in the negative camp. Equities experienced a technology-driven set-back, despite a relatively solid reporting season.

The function of the market reaction to the geopolitical events and macroeconomic datapoints was far from straightforward, and unlikely to be predicted based on commonly-accepted market “truths”. In the US, we saw a counter-intuitive reaction to the Fed’s 50bps rate cut, with the short end of the yield curve mostly unmoved, and a sell-off at the long end following the announcement. In equities, Value outperformed Growth, even as bond yields dropped materially3.

Elsewhere, during the July/August volatility, fixed income markets staged a period of outperformance versus equities, with correlation between the two squarely back in the negative camp. Equities experienced a technology-driven set-back, despite a relatively solid reporting season.

The function of the market reaction to the geopolitical events and macroeconomic datapoints was far from straightforward, and unlikely to be predicted based on commonly-accepted market “truths”. In the US, we saw a counter-intuitive reaction to the Fed’s 50bps rate cut, with the short end of the yield curve mostly unmoved, and a sell-off at the long end following the announcement. In equities, Value outperformed Growth, even as bond yields dropped materially3.

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