The economic environment for the capital markets is subject to change as we speak. About one and a half years ago, the global economy shifted from recovery to boom, which was very advantageous for the markets. The features were strong, broadly based economic growth, low inflation, very supportive monetary policies, good earnings growth, and limited price fluctuations on the markets. We have now started leaving this best of all worlds (“Goldilocks scenario”) in more and more categories.
The 4th BBVA Latin American Local Markets Conference in London gave me the chance to speak in detail with some local Latin American representatives. In the following, I would like to share some of the insights I gained from these conversations and the narratives that may affect 2018.
2017 was an excellent year for stocks. Developed markets were up more than 16% in local currencies, emerging markets almost 28%. Read more
Capital markets recorded a positive year of 2017. The performance of the various asset classes was of the textbook variety: the higher the risk, the higher the return. At slightly more than 1%, even low-yield asset classes such as euro government bonds or US Treasuries (in USD) posted positive rates of return1). This came as a surprise seeing that many experts had expected higher yields for government bonds, which would have come with negative effects on prices.
Volatility has increased on the markets. The main reason for this has not occurred often in the past years: statements by the central bankers according to which the extremely expansive monetary policy will be reeled in. Are we going through a trend reversal?
On Sunday 4 December Italy will be holding a referendum on an amendment to the constitution. This is relevant particularly because in case of a rejection, the political uncertainty would increase.
The market participants are still focused on the implications of Donald Trump’s victory at the US presidential elections. In simple terms, “Trumponomics” are a combination of expansive fiscal policies and restrictive trade policy. An increased budget deficit is supposed to support economic growth, while the curbing of free trade aims at job protection.
Uncertainty is high, while volatility is low. How to resolve the contradiction?
Bond yields were up last Friday, whereas equities recorded losses. Signs that the bull market with low volatility, which started after the Brexit vote, is drawing to an end are becoming more plentiful.
In the weeks following the Brexit referendum, the prices of many asset classes were rising amid mild fluctuations. However, an increasing number of clues suggest higher fluctuation for the coming months.