Are we nearly there yet?

By Clive Hale, director, FundCalibre

Added 15th September 2016

With children now back at school and pubs starting to put up the Christmas decorations (I kid you not), the summer holidays already seem like a long time ago and the constant cries of 'are we nearly there yet' - only to have the little darlings fall asleep 20 minutes before you finally reach the destination - a distant memory.

Are we nearly there yet?

I remind you of it though, as it seems to be a perfect analogy for market participants in the seemingly endless bull market in which we find ourselves. Fundamentals have well and truly gone out of the window and stock markets are seemingly entirely dependent on whatever the next set of monetary policy meeting minutes reveal. But are we becoming complacent, right at the very time we should all be more on our guard? We may be able to find out.

Used to the fact that monetary policy has been data-dependent for the past who knows how long, markets rallied last week when the US jobless numbers came in below expectations. They were under the assumption that the much awaited second US interest rate rise would once again be put on hold – only to be wrong-footed by Federal Reserve governor, Eric Rosengren, suggesting that interest rate rises could be coming sooner rather than later. Wall Street had its worst day in two months on Friday and, this morning, world stock markets continued to fall.

At the same time, we had Kuroda-san, the Bank of Japan governor, saying that there is “no limit to monetary easing” and that he would cut rates as far into negative territory as needs be, if the current policies fail to stimulate the Japanese economy.

As markets have fallen, bond yields have 'soared'. In the past few weeks the yield on the 10-year JGB has gone from minus 0.3% back to pretty much 0%. It doesn’t sound like much, but the losses inflicted on short term traders, especially those whose positions have any element of gearing, have been more than painful. This type of event is supposed to happen once in a blue moon, and risk controllers and management content themselves with that fact - until it all blows up, which is beginning to look like the case with JGBs.

The malaise has already spread to other sovereign bond markets: US 10-year treasury yields hit a new high and the German 10-year bund rose above zero for the first time since June. This came on the back of the ECB press conference on Thursday, given by Mario Draghi, whose body language and demeanour was contradictory to his less than convincing statement that “the European economy continues to recover”.

In a 'normal' world, rising US interest rates would be seen as a positiveindicator: that the economy is in good health. It's a sign of the times I'm afraid that the VIX – Wall Street's 'fear index' - rose 30 points instead. Kuroda-san might be one of the few people with a smile on his face: if the Fed does raise rates as early as next week, the yen should fall against the dollar.

With investors taking fright and government bonds feeling as much pain as equities, absolute return funds still look like a good bet for risk-averse investors. My favourites remain Elite Rated Church House Tenax Absolute Return Strategies, Henderson UK Absolute Return, Premier Defensive Growth and Smith & Williamson Enterprise.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Clive's views are his own and do not constitute financial advice. 

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