Market Perspectives April 2019
Find out our latest key investment themes. And with volatility set to stay elevated in 2019, can markets head higher still this year?
Tactical opportunities
05 April 2019
Higher volatility creates opportunities to take a more tactical stance in markets. The aim is to try to capture dislocation within assets when our views differ from markets’ pricing.
In volatile times, there are more opportunities to be tactical.
The current economic cycle has been going on for almost 10 years, partially thanks to the support of major central banks and also thanks to the shallow recovery that has prevented the built up of large imbalances.
Our own expectation is for the economy to keep on growing at a slow but steady pace. However, with several indicators pointing to the cycle being in a late stage, a string of worst-than-expected economic indicators could easily spook markets and lead to short periods when different asset classes start pricing a higher likelihood of a recession.
Looking at realised volatility in global equities, after reaching an all-time low in 2017, it has crept up in recent months on the back of growth fears (see chart). Current realised volatility levels are not far off those reached around events such as the Long-Term Capital Management crisis in 1998 or the China energy sell-off in 2015. In volatile times like those, there are more opportunities to be tactical, alongside a core portfolio.
The weak print in the purchasing manager’s index – a leading economic growth indicator - in Europe in March, coupled with an inversion of the yield curve in the US, led equity markets lower for a couple of days. This episode was short-lived but it is likely that we will see two or three episodes this year lasting a few weeks during which markets will take a more bearish tone on the back of surprisingly negative data.
Unless we revise our own expectation of “no recession on the horizon”, we see the aforementioned short-term market moves as opportunities to buy into the area of the markets that will have priced the highest probability of a recession.
Such opportunities could also arise from geopolitical risks as well. In that case, it is not the actual economic indicators that would unsettle markets but the potential impact on growth geopolitical tensions, such as trade frictions or financial sanctions, that they could have. In the past couple of years, there have been a few of those events that have impacted financial markets sentiment negatively at times for one or two weeks.
In that case, the dislocation in markets has often been limited to a couple of sectors, regions or asset classes that were the most affected by the particular geopolitical risk. We will be on the lookout for such localised dislocations in markets.
We expect those opportunities to be shorter-term (1-3 months) than all the other themes we are mentioning in this publication. For this reason, we will focus on them in our weekly publications rather than in the future edition of the “Market Perspectives”.
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