Monthly Commentary – October

Equity markets suffered heavy falls in October with several major markets down more than 10% from their previous peaks. The decline was attributed to various factors, including the escalating US-China trade war, rising bond yields, earnings disappointments and concerns about the prospects for global economic growth. The US Federal Reserve signalled that it might pursue rate rises more aggressively, exacerbating worries about bond yields. Across the Atlantic, the Brexit negotiations remained mired in difficulties and the Italian government proposed a budget that put it at odds with the European Union. A fall in the oil price put pressure on energy stocks; gold, however, benefited from its ‘safe haven’ status. Meanwhile, the alleged murder of the journalist Jamal Khashoggi in Istanbul strained Saudi Arabia’s relationship with the US, even as US-Turkish relations improved from their lows with the release of an imprisoned American pastor.

Economically sensitive sectors were the weakest areas of the market, with industrials, materials, information technology, energy and consumer discretionary all declining sharply. Among the poorest performers were the ‘FANG’ stocks (Facebook, Amazon, Netflix and Google). In particular, Amazon and Netflix lost a substantial chunk of their value as disappointing results caused investors to question the assumptions that had propelled these stocks upwards. We have avoided this area of the market as we believe that its valuations do not reflect the potential risks – and because we see a better balance of risk and reward elsewhere.

While few areas of the market provided much relief from October’s falls, the traditionally defensive sectors fared best. Utilities and consumer staples managed to produce positive returns, while healthcare and telecoms held up better than the broader market. The relative resilience of the telecoms sector came after a long period in which it was resolutely out of favour.

One particularly unloved company in this sector has been BT, whose shares rose by 7% during October. At the end of the month, a new CEO was appointed to replace the outgoing Gavin Patterson. During Patterson’s tenure, BT became an integrated telecoms provider, notably acquiring mobile operator EE in 2016. However, it ran into trouble after problems arose at an Italian subsidiary. Investors’ belief in BT’s ability to right itself had waned, but they appear to be warming to the company’s turnaround strategy, which focuses on cutting costs and investing in network leadership. The new CEO, Philip Jansen, adds fresh impetus. In the meantime, the shares offer a significant dividend yield, which pays us to wait while the company implements its turnaround plan.

As markets experience a more turbulent phase, BT is an example of the sort of company we want to retain an investment in: one that has plenty of potential when so many other stocks have a less promising outlook.

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount 3you invest.

Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this article should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.