In the past two days, the stock exchanges, spearheaded by the New York Stock Exchange, have shed the entire previous gains of 2018. Even last week, inflation worries had started to weigh on the markets. But the recent reaction was extraordinarily strong, with experts likening it to the excellent employment report in the US.
The current environment is very positive for the capital markets: strong growth, low inflation, supportive monetary policies, good earnings growth, and low volatilities, i.e. fluctuations. Also, the numerous risks have not had a significantly negative impact on prices. However, the phase of rising prices started as early as March 2009. This environment implies that any change in the relevant parameters such as growth, inflation, and monetary policy would be tantamount to deterioration, given that improvement is not possible anymore. The most important question asked by investors at the outset of 2018 is therefore whether this positive environment is still here to stay.
The seemingly unrelenting climb of US equities has stopped in August. Market volatility spiked, the decline of the US dollar ended, bond spreads widened, and macro risk-indicators surged. While there has been no major correction (yet), the fresh breeze of optimism that characterized equity markets in the first half of the year gave space to the somewhat stale atmosphere that typically takes over when the majority of investors switch into risk-off mode.
Author: Christian Süttinger Senior Fund Manager Multi Asset Management
In Part two of this series on alternative investment strategies, we described the most important strategies “trend following”, “global macro”, and “long/short equity”. In this Part three, we will be looking at approaches that are less well-known but equally tried and tested.
Gerhard Beulig, fund manager and responsible for the YOU INVEST line, expects capital markets to remain highly volatile for a while. The central banks are trapped by their own extreme interest rate policy; interest rates therefore remain at practically zero percent for short-term investments, with no trend reversal in sight. Investors who want to earn at least the rate of inflation in the long run, will find no way around investing on the capital markets. At the moment the fund management team prefers the USA to the Eurozone due to the positive interest rate differential; we regard equities as neutral. The foreign exchange risk remains hedged.
Earlier this year the president of the ECB said we would have to get used to elevated levels of volatility. And it is true, the market environment has changed. The years 2009 to 2014 were subject to an asset price reflation regime. High rates of return were coupled with low volatility. This relationship has now reversed. The asset classes are now pricing in the moderate recovery in the industrialised economies, with low expected return amid elevated fluctuation as a rule. Read more
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