In early December we argued that despite the increase in earnings, and the move in equity prices, the attractiveness of the equity market was somewhat ambiguous. While the earnings yield of equities increased through most of 2018, so did the return on cash, leaving the difference between the two virtually unchanged.

At the start of 2018, we argued that while the economic outlook was strong, the certainty of rising short-term interest rates will have implications for the relative valuation of all asset classes. This implied that for equity markets, P/E multiples will need to fall, and consequently price returns will be less than earnings growth. For fixed income markets, this implied that long duration bonds will perform poorly, but credit spreads are likely to remain stable. 

Many emerging equity markets are now in bear market territory, having tumbled by 20% this year. A number of currencies reached historic lows, while external bond spreads widened. Such sell-offs often offer opportunities to investors. But to understand whether the current sell-off represents such an opportunity, it is important to understand the causes behind it.

A less hospitable external environment