“Global financial market volatility has awoken from its slumber,” in the words of ANZ economists.
US equity markets are down around 9% from their all-time highs, with European and Asian markets in similar states.
After holding near historic lows for the majority of 2017, the VIX measure of US equity volatility has spiked to its highest level since 2011 (bar a brief period in 2015).
ANZ economists, in their latest Market Focus publication explain: “Ultimately it appears that markets have finally come to the realisation that abundant global liquidity conditions are not going to last forever…
“Global growth momentum is strong at present, and this is leading to speculation that inflation is finally set to make a comeback, particularly in the US.
“Indeed, US average hourly earnings growth, at 2.9% year-on-year in January, is at its highest level since 2009, which has helped cement expectations for ongoing Federal Reserve policy normalisation.
“The US 10-year bond yield is now at 2.85% – effectively the highest in close to four years…
“The Bank of England surprised last week with a more hawkish tone than anticipated, noting that monetary policy will “need to be tightened somewhat earlier and by a somewhat greater extent” than previously expected.
“The European Central Bank still appears to be inching towards the exit door. These normalisation signals are broadening.”
Not the time to reassess your risk profile
So with uncertainty around the pace at which interest rates will be hiked spurring market volatility, what should retail investors do?
Summer KiwiSaver Investment Committee chair and Authorised Financial Adviser, Martin Hawes, says this isn’t the time to reassess your risk profile.
“If you are feeling uncomfortable with the amount of volatility and the way your portfolio is going, you need to wait until this settles down and then reset your risk,” he says.
“Effectively to change your setting at the moment is to sell into weakness.”
Hawes recognises some believe the current market weakness is a precursor to a crash. However, he doesn’t see this happening.
Rather he sees markets settling down in a matter of weeks or months, so remains bullish.
Ultimately, he believes “the fundamentals are still in place”. World economies and companies’ profits are still growing strongly. Interest rates also remain low.
Hawes is of the view that despite China’s rising influence, the US economy continues to have the greatest impact around the world.
The notion, ‘when America sneezes, the rest of the world catches a cold,’ isn’t going away anytime soon.
Hawes accordingly recognises markets may be spooked by the prospect of the Federal Reserve raising interest rates in the US five or six times this year.
He maintains that if the Fed Board of Governors’ new chair, Jerome Powell, came out and said rates wouldn’t be hiked more than three times, markets would calm down.
He notes that in addition to strong US jobs data dashing expectations around gradual rate rises, having a new chair in the driver’s seat is increasing uncertainty.
Hawes also accepts the share market is letting off some steam, further to it getting ahead of itself.
Finally, he maintains high frequency algorithm trading has exacerbated market volatility.
“Large numbers of these algorithms are working on the basis of momentum. If the market is going down, many of the algorithms will automatically start shorting, and that will magnify the extent of the fall.
“It does it on the other side as well. In January, when markets ran up pretty strongly, I suspect that was again magnified by algorithm trading – robots really.”
Overweight on international, neutral on NZ
In line with his view that we’ll see markets bounce back soon, Hawes believes now is a good time to buy.
While he sees an uptick being “reasonably synchronised” across markets, he continues to favour international equities over New Zealand and Australian ones.
With global shares – European ones in particular – languishing, they’ve been better priced relative to shares on the New Zealand market, which has had a very good run.
To further allay investors’ concerns, Hawes makes the point that investors (like those in KiwiSaver) who make regular contributions, should take comfort in the fact they’ve been getting bang for their buck, purchasing more shares at lower prices in recent weeks.