Rajeev De Mello, Chief Investment Officer, Bank of Singapore, Member of OCBC Wealth Panel

A confluence of various factors has pressured equities, commodities and bond yields lower and pushed volatility across asset classes higher. We believe that clients should continue to diversify their portfolios to cushion against ongoing volatility.

A few major concerns originated around China:
– Trade tensions with China and the prospect of a further deterioration,
– Weaker Chinese economic data, partly due to past policy tightening, tighter regulations and more recently due to tariffs,
– China policy response to weaker equity markets. It might have amplified existing concerns especially when equities started falling again in the last few days.

After holding up relatively well, a few recent events point to potential weakness from Europe:
– Italy’s populist government is testing the EU and the Europeans would prefer to see the market discipline the proposed budget deterioration. That has further weakened the banking sector which is now down about 25% since the start of the year,
– European Purchasing Managers Survey data indicated that sentiment has deteriorated (Italy and Car regulations).

Concerns that earnings from US companies will not grow enough to justify their current equity valuations have been heightened by more cautious Company Outlooks during the recent Earnings round. Major companies have pointed to concerns about tariffs, margins and foreign sales.

Geopolitics rarely is a trigger for a sell off but has probably contributed due to an increasingly tense global situation as the US administration signals its intent to reorganize the post 1945 international system.

The US mid-term elections could be a reason why some equity buyers are not investing but we don’t think that the likely outcomes would be a reason to reduce risk.

None of these factors alone would justify the sell-off (and most are not new) but the price action does warrant close monitoring of our stance.

The situation should become clearer in coming months, with a possible Trump-Xi meeting as well as the decision on whether to broaden and increase tariffs on imports from China. Asian growth remains resilient, supported by the improved economic management of recent years. US tariffs on Chinese exports could hurt, but some countries will benefit from the diversion of trade flows. More generally, fiscal positions are solid, inflation is under control and imbalances are limited. Most economies in the region have enough policy flexibility to respond to external pressures and to limit the overall impact on growth.