For most of the third quarter, it was unusually calm for markets. As the fourth quarter unfolds, we predict markets will enter into a phase of higher uncertainty. Read this month’s Market Watch ‘Bracing for a bumpier ride’ to find out more.

1. Market Watch – October 2016
Bracing for a Bumpier Ride
STRATEGY FX
Remain underweight
equities on unattractive
valuations and expect
heightened volatility
FIXED INCOME
Remain positive on
emerging market high
yield bonds. Be selective
amid a surge in issuance
Back to yield hunting,
but stick to “good”
carry such as IDR, INR,
RUB and possibly BRL
EQUITY
Negative on developed
markets; neutral on Asia
ex-Japan. Focus on
political risk
For most of the third quarter, it was unusually calm for markets. As the fourth quarter unfolds, we predict
markets will enter into a phase of higher uncertainty.
The growing perception that global central banks will soon stop easing monetary policy (or in the case
of the Fed soon renew hiking rates) has triggered a jump in bond yields and a steepening of yield
curves.
Some investors are afraid that there might be a re-run of the taper tantrums of 2013. We think that a
re-run of the Taper Tantrum is not likely.
We are still living in a low growth, low inflation world, and there is no strong case for major central banks
to wind down their bond buying program significantly anytime soon.
The Fed should be able to raise rates without a tantrum in bond markets. Hence, the hunt for yield
should persist.
With bond yields still hovering close to record lows, equity markets are unlikely to experience a sharp
sell-off enough to warrant going further underweight in equities.
That said, an unspectacular growth outlook combined with a maturing economic cycle limits the
potential for big capital gains for equity markets for the remainder of the year.
We have learnt from Brexit not to ignore political risks. The US Presidential elections on November 8 will
be one obvious risk. A Clinton victory would be favorably for markets and remains the most likely
outcome, although the race has tightened. A Trump victory carries higher risk of policy uncertainty.
Beyond the US, the upcoming Italian constitutional referendum, German and French elections in 2017
and the potential for Brexit-related fallout in the euro area to emerge argue for the importance of
defensiveness and selectivity within an overall balanced portfolio.
We think that equities are likely to range-trade for the remainder of 2016 but with heightened volatility.
On asset allocation, we continue to prefer credit over equity. We keep our equity underweight position
intact. On equity regions, we want to express our equity underweight evenly in the developed market –
US, Europe, and Japan, while we keep our neutral call on Asia.
Marc Van de Walle
Global Head of Products

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