Note Précis June 4,2018: Rising Interface of Policy and Market Volatility
After initial sell offs ostensibly on the Italian political impasse, worldwide equity markets moved up sharply and fixed income yields stabilized. We do not see wild swings as signals of rude health. In reality, capital markets are less efficient than many model. Real life participants tend to ignore signals. Two recent examples suffice. In the late 1990s, the existence was not sudden of high equity multiples overall and nor was the paucity of revenues across technology/media/telecom. Until dispensed with, it became the source of risk and debacle. Similarly in the mid-2000s, there was sustained exuberance about ability in the credit market to repackage risk. It was threw up risk and illiquidity, even now a decade of quantitative ease later. Recent political, central bank and capital market developments likely indicate that the backdrop for the next crisis of risk assessment may be over sovereign debt paved, even if inadvertently, by excess quantitative ease. Concurrently, aggressive politics, international trade and internal fiscal-monetary interactions appear for advanced and emerging areas alike, not least in the United States with odd felicitations. In business risk evaluation (much like vehicles in real life) too much friction results in gridlock and too little results in chaos, including for markets. We have cash above benchmark, with precious metals as overweight hedge.
Even though interest rates are low, we underscore favor for strong and conservative balance sheets as well as quality of product/service delivery, whether in fixed income or in equities. Despite their better growth, emerging markets have dropped on signs of global moderation. Lower equity valuation has once more, not helped Europe or Japan. Despite 25-30% year-over-year gain in Q1/2018 for S&P 500 earnings, we see its long term annual growth as 7%, not the consensus 12%. As is also classical, banking is likely to set direction. Those having earlier and more thoroughly continuing restructuring are likely to press advantages while others, having lost opportunity, now struggle with restructuring just to keep up.
StrategeInvest’s independent consultancy operates as Subodh Kumar & Associates. The views represented are those of the analyst at the date noted. They do not represent investment advice for which the reader should consult their investment and/or tax advisers. Any hyperlinks are for information only and not represented as accurate. E.o.e.