Increased market volatility will characterise the investment world over the coming months, according to Baring Asset Management.
And Michael Hughes, Barings chief executive officer, says the gradual tightening of credit conditions around the world will be the main cause of it.
He also says low levels of volatility in recent years have tempted investors into ‘riskier’ assets in search of returns, under what has proved a false security blanket.
“Recent market volatility may well lay the foundations for attractive investment returns over the medium to longer term, but all the indications are that there could still be more weakness to come before we are done,” he says.
“The typical extent of a correction during a bull market is 7% to 8% over a period of two to three months, and we have not experienced a decline of more than 10% in the equity markets since 2003.”
Hughes says a gradual tightening of credit conditions around the world has been one of the main contributory factors to recent market volatility.
According to Hughes, the accommodative monetary conditions in the US have gradually been reversed in a series of interest rate rises that have taken short-term rates from 1% back up to 5.25%, close to the long-term average of the past 20 years.
Rates have also been rising in the UK and Europe, and finally moved above zero in Japan in July last year. Credit spreads have also begun to rise.
“The competition for funds between markets and economies is intensifying and this will produce a major headwind for all markets,” Hughes says.
“Easy availability of capital has generated very high amounts of leverage in the global financial system, and as this starts to be unwound, the economic and market effects could be very significant.
“We have already seen some evidence of this in the US in the sub-prime mortgage market, as evidenced by recent market movements, where default rates have risen sharply and twenty-two lenders to this area of the market have declared bankruptcy in recent months.”
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