It’s been a busy start to 2018 – trade wars, a tech rout and rising interest rates have caused global financial market volatility to increase. Major equity indices ended below their January peaks and have turned red for the year to date. The long term impact of some of these events has yet to be quantified. In the short term however the impact is clear, investors are becoming more wary of markets.
The US political situation adds to overall economic uncertainty - it has the potential to over inflate the economy. For now, the economic backdrop is holding firm, yet signs that we are entering a new phase of the market cycle are appearing. We have seen rising yields, sharp equity corrections and indicators that inflation risks are becoming more prevalent. Volatility has picked up across most asset classes and the episodes of equity market volatility indicate that the returns of 2017 are unlikely to be a feature of 2018 and the number of potential outcomes ahead for the market has certainly increased.
This year is proving more familiar to investors with long memories; equity market volatility has risen to levels more consistent with previous investment markets. So far this year, we have witnessed a greater divergence of returns across and within asset classes. Rising interest rates area challenge for both bond and equity markets, and valuations remain elevated across most markets. However, earnings growth is a powerful driver for equities, and we still see an attractive risk/reward trade off.
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