The end of May saw equity markets endure a volatile week, led by the 7.3 per cent single-day fall in the Nikkei 225 index in Japan.
After such a strong period in equity markets, is this a warning of something worse to come, or are markets just blowing off a little steam?
Firstly, we should look at the selloff. The 7.3 per cent fall made a lot of headlines, but it took the Nikkei back to levels seen only 10 sessions before.
This illustrates how rapidly the Japanese market has risen of late – a selloff after a 70 per cent rally in six months is hardly surprising, and takes a little heat out of the market.
It would appear that markets were spooked on three fronts. Firstly, the upset to sentiment caused by the Congress testimony by Ben Bernanke followed up by the Federal Open Market Committee minutes; weak Chinese economic data; and ambiguous comments from the Bank of Japan about maintaining low Japanese government bond yields.
Given the returns seen in the first five months of the year have exceeded many investors’ expectations for the whole of 2013, it is only reasonable to expect a soft patch in equity markets.
What is important to remember is the current drivers of equities – the central banks – remain in place for the moment, and there may be more to come if the Bank of England and European Central Bank (ECB) seize the initiative.
The backdrop of money printing and low interest rates will be around as long as economies need to rebalance and move out on a sustainable growth path.
This leads us to conclude that with more aggressive central banks, a more benign economic backdrop overall and diminished tail risks from the eurozone, we are less likely to see a repeat of the significant drops in risk appetite and resulting market selloffs that we saw in the spring and summer of 2010, 2011 and 2012.
Given this backdrop, we do expect further progress to be made in markets, particularly if this current soft patch proves to be nothing worse.
Rob Burdett is co-head of multi-manager at F&C Investments
