October in the financial markets was marked by a sharp increase in volatility and a serious correction in stock indices. Only at the end of the month the situation stabilized somewhat, fixing a result of -7% on the S & P 500 index. There are no new news that caused such a decline. Rather, there is a heightened fear of investors about the slowing down of China’s economy due to imbalances that have accumulated over the decades, which could trigger a trade war with the United States. Europe also has its own reasons for stress: in addition to the drama with Brexit, populists in power in Italy continue to try to increase the budget deficit beyond the EU's limitations, increasing the already high debt load. In the USA, excellent macroeconomic data continue to be published, but this is also perceived as negative, because leads to an increase in the Fed's interest rates, and besides, investors are well aware that this year the effect of Trump's tax cuts has affected and this effect will disappear next year. And the growth of the budget deficit in the USA due to this tax reform leaves no room for fiscal stimulation of the economy in the event of a recession in the coming years. It is curious that on such an external background, the UX index added 5% over the month.
The Chinese Communist Party now faces conflicting tasks: not to allow a significant slowdown in the economy, but without excessive debt growth, reduce risks in the financial system, but provide access to loans for problem borrowers, avoid further inflation of the real estate bubble, but without a collapse in prices and panic. Only by a miracle all these goals can be achieved at the same time, because a more likely scenario - a slowdown with some crisis but controlled events will still occur, however, not necessarily right now. In other words, we do not expect too positive external background for the coming years, but as we have repeatedly written, Ukraine is largely protected from investor sentiment. Since there has not been a large inflow of direct and portfolio investments into the country in recent years, there is nowhere to flee capital, and the banks have not increased their lending for 10 years, and therefore there will be no new banking crisis. Of course, it is not easy for the state to finance the budget, but with the current IMF program and recent borrowings, this issue has been removed for almost a year. Therefore, we continue to expect a slow recovery in the Ukrainian economy and are moderately optimistic about Ukrainian stocks.
