Despite the recent market correction, we believe valuations of Swiss equities remain high versus historical averages. In this paper, we discuss why such high levels could represent a significant risk to investors and outline the four distinct catalysts that could potentially trigger increased market volatility.
Political events typically have a short-term impact on financial markets since they generally do not have a meaningful impact on the economy. But a decade after the Great Financial Crisis (GFC), many developed world economies are still struggling to regain their footing, and years of easy monetary policy have pushed up the prices of risky assets, benefiting the holders of those assets disproportionately more than others.
Combined with geopolitical events and a surge in refugees and immigration from emerging to developed countries, the ground has become fertile for parties stoking populist and nationalist sentiment. One needs not look further than the events following the Great Depression to find a historical analogy to today. In this context, we view the recent political events in Italy as especially concerning as they will likely have an impact beyond the short term and are a further example of the rise of populist and nationalist parties globally. While the market took relief from news that Movimento 5 Stelle (M5S) and Lega Nord (LN) had successfully formed a coalition government, thereby avoiding new elections and political uncertainty, we are not nearly so optimistic about the future prospects for Italy or Europe more broadly.
The three arrows of Abenomics was initiated five years ago by Prime Minister Shinzo Abe. While the first step was completed quickly, the second step is currently underway and could lead finally to the much-anticipated real wage growth. In this paper, we discuss how the second arrow should support domestic demand and help boost Japan’s small caps.
-The economic and market environment is more uncertain, but investors have become less complacent about the risks ahead
-We expect growth to remain strong, but is likely to become more disparate across economies
-The inflation outlook is unclear. While we do not expect a surge in inflation, markets may still be underestimating the risk of upside surprises
What do the global financial crisis of 2008 and the recent market correction have in common? In our view, both events were driven by excessive leverage. A bubble bursting usually involves losses based on investment. However, financial bubbles created by leverage are particularly dangerous to the economic environment as they comprise unexpected losses. They are difficult to spot, especially when they appear in parallel with other bubbles (such as the technology and e-commerce bubbles in the US).
Much like assets financed by credit, shorting volatility could result in unexpected losses. In our view, the February market correction was just a warning on the short volatility bubble. In this paper, we reveal where we believe markets will go from here.
By Anisse Marzouk, Client Portfolio Manager and Alexandre Marquis, Head of Client Portfolio Managers, Equities