Perspective
We have seen an increase in market volatility this week, driven by uncertainty over Chinese property and U.S. central bank policy changes.
Below is our perspective
- 2021 has been a benign year in terms of negative news (financial related); therefore, growth asset prices moderated quickly, as expected, to reflect short-term uncertainty.
- At one point, the ASX200 was down -6.5% from recent highs, and the volatility index (fear gauge) reached a six month high.
- Subsequently, we’ve seen a solid rebound in growth assets supported by excess liquidity from ultra-accommodative policy settings.
- On Wednesday, the PBoC (Peoples Bank of China) injected +US$14billion into the banking system in a show of support for financial markets and the economy. This policy move coincided with the embattled Evergrande Group negotiating an interest payment to bondholders.
- The Evergrande crisis highlights China’s shortcomings, particularly the state’s influence over the financial system and goal for common prosperity. Foreign investment across the Chinese economy is restricted; therefore, credit defaults are limited mainly to state-run institutions and domestic investors.
- On Thursday, the FED (U.S. Federal Reserve) announced its well-telegraphed intention to begin tapering bond purchases from November 2021, reflecting a view that economic growth and fiscal policy support is sustainable. The members expect cash rates to start increasing from late 2022.
- Movements in interest rates will be an essential driver of markets, and to date, this has been orderly. The FED’s transparency towards policy changes has taken away many surprises that have historically hurt investor sentiment.
- Last quarter, the Advisory Board reduced their overweight exposure to Emerging Markets due to expectations of a strong USD (FED tapering) and risks to secular growth stemming from China.
- Low rates, policy support, and a strong economic backdrop are tailwinds for growth assets. Our House View remains overweight growth assets and underweight Fixed Interest. We remain patient for opportunities and will look to invest capital around periods of increased volatility.
General Advice Warning: The comments do not take account of your objectives, financial situation or needs. Before acting on any general advice, you should consider if it is appropriate for you.