Fund Selector: Volatility does exist

Seemingly, for many this came as a shock.

Early quarter reversals in western sovereign bond yields – as thoughts turned from deflation to reflation – were followed by equity market wobbles as both Greece and China dominated headlines.

However, currency markets were more sanguine.

Elsewhere, improving macroeconomic data at the start of the second quarter – in the US and in Europe – finally saw sovereign bond yields move off their lows.

The current poster child for central bank intervention, the German bund, saw some of the more eyebrow-raising moves, with its 10-year yield moving from its lows of just 5 basis points to a peak of 0.98 per cent in short order, wiping out 40 years of investor income in the process.

Credit markets wobbled – particularly investment grade – but it was interesting to note that areas like high yield came through relatively unscathed. We suspect this may be a temporary hiatus.

In the medium term, the normalisation of US monetary policy and a revival of domestic growth in Europe are likely to place continued pressure on bond markets.

Aside from the ongoing crisis in Greece, the other big story of the quarter was China and the reversal of the recent run-up in domestic equity markets. Hard on the shoulder of claims that ‘this time it is different’, investors have once again been faced with (what should be) a common truism: ‘If it looks like a bubble and floats like a bubble…’

Chinese equity markets have now fallen by more than 22 per cent to July 14 in the space of three weeks, despite a plethora of government initiatives aimed at soothing investor sentiment. Economic data remains relatively weak in the region, so we continue to view developments with caution.

The opening up of Chinese equity markets will undoubtedly provide opportunities for the diligent and selective investor over time, but market moves in recent months have divorced themselves from the underlying fundamentals. Episodes like this never tend to end well.

The quarter has thrown up a number of headlines.

Ultimately, though, there are still reasons to be positive about the broader macroeconomic backdrop.

US economic data continues to rebound past another winter wobble. In fact, we are finding it increasingly difficult to comprehend that an economy such as the US, with GDP growth near 4 per cent, core inflation at circa 1.7 per cent, and job openings and consumer confidence close to cycle peaks, should still be on ‘emergency’ rates.

Exogenous shocks aside, the possibility of an interest rate rise in the latter months of the year remains on the table.

Sometimes it seems necessary to remind people that this is a good thing – a sign of a healthier economy returning to some form of normality.

Marcus Brookes is head of multi-manager at Schroders