What does Hollywood teach us about investment markets?
Please humour me for a moment here before you dismiss me as a movie buff in the wrong profession. Imagine you are 30 minutes into a 90 minute blockbuster. It has been plain sailing for our protagonist so far – great job, great family, a house in the suburbs and outings with friends on weekends. Now, if you are a regular movie goer like me, you know that something is not right, you don’t know what it is but you know that there is a twist around the corner – life is going to get a lot more “exciting”.
We are seeing a similar screen play develop in the world of investment markets. As of the end of Q3, equity markets have been enjoying one of the longest rallies in history (noting some volatility post quarter end). Risk markets including credit have seen some sustained support from coordinated central bank action post global financial crisis. How long will this last? Over the last 6 months, we have seen certain themes such as rising geopolitical risks, Fed rate hikes and the end of ECB’s Quantitative Easing posing questions on the sustainability of this risk rally.
Individual asset classes have provided diverging performances over Q2 & Q3, but in this divergence, we believe there is one underlying theme that unifies the various markets – the expectation that volatility is likely to increase over the medium term. Investors should be wary of adding more risk at this stage in the cycle and resist the temptation to chase incremental return in this low yield environment.
Bearing this in mind, clients could consider:
Download the our report 'Investment market update - Lessons from Hollywood' for more insights.