Investors are climbing a wall of worry. Will their faith in policymakers pay off, or do they need to take more decisive action?
The structural headwinds of deglobalisation and rising inequality, as well as the COVID-19 recession, threaten the impressive rally in equity markets seen since the crippling lows of March, according to Stephen Miller, investment strategist at GSFM.
“This comes at a time when monetary policy is at best exhausted,” Mr Miller said. “And at worst inappropriate. The transmission methods don’t appear to be working as effectively as they have done in the past. And when we approach the zero bound on interest rates, it’s not clear to me that lower interest rates or negative interest rates will result in more spending.
Investors might also be too confident in the prospects of big US tech companies, which face the prospect of being broken up if the Democratic Party wins the upcoming presidential election.
“(Advanced economy equity markets) appear to be priced, in my view, for an optimistic but not necessarily implausible scenario,” Mr Miller said. “That reflects an extraordinary faith in the ability of policymakers and central banks to navigate a path through. And it also implies that the markets are pretty sanguine about the oligopolistic privilege currently enjoyed by a few of the FAANGS.”
And with bond yields approaching the zero bound, it’s no longer clear that they’re a worthwhile diversifier for a portfolio of risk assets. That means that investors might need to look to gold, absolute and unconstrained bond strategies, and active equities including long/short and hedge fund exposure.
“Are markets complacent?” Mr Miller said. “Are we complacent about the onset of regulation? Are we complacent about oligopolistic privilege? Are we complacent about the ability of central banks?... One of the big lessons we need to take away from this is that we need to relearn the importance of diversification – uncorrelated sources of return in a multi-asset portfolio.”
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