'The weak are suddenly going to get weaker': Why a $603 billion investor is bracing for a rocky end-of-year ride for markets

neil dwane

  • Neil Dwane, a portfolio manager and the global strategist at Allianz Global Investors, is not counting out a rocky end to the year for markets. 
  • In an interview with Business Insider, he outlined why the conditions that hit stocks in February haven’t disappeared even though markets have rebounded, and why they could soon make a comeback.  

For stock-market investors, the year 2018 could come full circle if it ends with another volatility shock. 

They still have fresh memories of the early-February episode, when the Dow Jones industrial average logged its biggest single-day point drop ever. The year may not end with another record-breaking stat, but it could wind down with volatility just as it began, according to Neil Dwane, a portfolio manager and the global strategist at Allianz Global Investors. 

Earlier this year, the stock-market sell-off was attributed to concerns about inflation and higher rates — a scene that played out Thursday as stocks fell when the 10-year yield touched a seven-year high

According to Dwane, the nervous investor base hasn’t gone away even though it has clearly moved on from the February shock, given the market’s 8% year-to-date gain and the drop in volatility. At the heart of investors‘ nervousness is the gradual tightening of financial conditions, particularly in the US as the Federal Reserve continues to raise interest rates

„A stronger dollar, a higher oil price, and tightening US dollar liquidity means the weak are suddenly going to get weaker,“ Dwane, who helps create the house view of the €524 billion ($603 billion) investor, told Business Insider.

„That could be corporate companies, it could be global economies — but at the margin, this is all creating more fragility in the system. We saw what it could do in February.“

Since February, we’ve also seen what these conditions have done to non-US markets, which are underperforming in a way that has not been witnessed since the Great Recession.

„That’s kind of like the unseen noose in the markets,“ Dwane said of quantitative tightening.

Although emerging markets have borne the brunt of the tightening this year, US markets may not continue to be spared. 

„I think Wall Street is not listening to the Fed saying rates are going up,“ Dwane said. „It’s paid Wall Street to go ’no they aren’t.'“

One of the reasons for the volatility shocks in February, he added, was the market’s realization that burgeoning inflation meant the Fed was less likely to alter its rate-hike plans. The central bank’s most recent projections show that it’s on track to raise rates again in December and three times in 2019. 

But the forthcoming months are not just about the Fed. The US midterm elections on November 6, and the UK’s official exit from the European Union on March 29, are just a few of the political events that could also create volatility, Dwane said. 

SEE ALSO: SOCGEN: Hedge funds are making historic bets that remind us of the dotcom bubble right before it burst

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Source: Business insider

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