Higher rates, lower stock markets?
Following a strong start to the year, equity markets around the world took a turn downwards last week. The fall has since accelerated in reaction to higher-than-expected wage growth data in the US on Friday as this raised concerns of rising inflation. There were also fears that central banks would raise rates faster than expected this year. The moves seem to have been exacerbated by a rapid unwinding of trades relying on continued low market volatility.
So should we be concerned that this might be the beginning of a trickier market phase where interest rates rise and stocks become relatively less attractive?
We don’t think so, for the following reasons:
1. Global growth continues to be robust and the most synchronous for 20 years, with leading indicators predicting more of the same for some time yet.
2. Reported corporate earnings and sales continue to be strong and are beating expectations.
3. Although we are positioned for an uptick in inflation during the first half of the year, we do not expect core inflation rates to pick up significantly, for the well-rehearsed reasons of technological and demographic change, and the pervasive impact of globalisation and low cost competition.
4. Following the recent shake out in equity markets, positioning and sentiment has moved from the extremes seen in January towards more normal levels.
We have been saying for some time that the low volatility environment was unlikely to continue indefinitely and that we wouldn’t be surprised to see a pull back in markets. Our client portfolios are diversified and positioned to withstand volatility. It’s very difficult to identify how long this pull back will last or how far the market will fall, but volatility does tend to breed more volatility and we wouldn’t be surprised to see this persist, at least in the short term. It is worth remembering though, that the moves in equity markets over that last few days have taken us back to the levels at the end of last year. Sell offs often provide the level headed long term investor with opportunities, so we will be spending our time (as ever) looking for ways to enhance returns for our clients.