It took so little for the atmosphere to change. From a growing level of confidence of economic healing and seemingly steady recovery, to a sudden flash of nerves to upset the markets; it turned on a sixpence.
The rumours, hearsay and tittle-tattle that the current stimulant of choice in the market might be withdrawn was enough to run a frisson of fear through the investment world. The fact that no formal announcement had been made but rather that it was just comments made by Bernanke that at some stage quantitative easing (QE) would come to an end was enough to raise the nerve levels.
The prospect of dropping the drug which has provided these QE highs and face some QE cold turkey was as a good a reason as any to see prices fall. However, it was the reverberations around the globe and especially in those emerging market bond and equity markets that showed just how interlocked and sensitive these issues were around the world.
Even the much-vaunted but poorly-performing Bric markets saw tremors with Brazil falling dramatically, further weakened by currency concerns.
Then add to that the over-exuberance of the Japanese market and you have a perfect combination of issues to push people to sell off. The tale of “Abenomics” has been somewhat over-told and over-bought, with prices seeming to rise on the glorious hope that Abe San may have finally found that elusive answer to the Japanese economic quandary. The old phrase “it’s better to travel than to arrive” comes to mind, as expectations in the markets seemed to have rushed too far ahead of actual delivery.
So what can we draw from this? The answer is, in fact, not a great deal, other than to underline the risks of QE and the potential effect of its ultimate withdrawal. Was Bernanke playing fast and loose with his language? Or was he far rather just sending out sensible warnings that at some stage such support and stimulants will be tapering off? In my view, the latter.
So what should investors do? Run for the hills in the face of market nerves? The summer storms of market fears are quite a regular occurrence and frankly should come as no surprise to investors. However, I would ask investors to look through the irrational nerves of skittish markets and look at the global economy. It is in the process of healing after the largest financial explosion that any of us can remember. The economies will in all likelihood continue to recover.
Yes, of course there are many issues to address and areas that can fail, from US debt and deficit to Euro concerns and the changes in the Chinese economy. However, behind this you have a global economy growing at a slightly faster rate than before but roughly on its long-term average. Thus, in my view, such storms should be used for the advantage of investors and clients as they provide us yet again with an opportunity to buy the same assets but at a lower cost. Are these summer storms? Maybe, but in reality we should look at some of these opportunities as a summer sale.
I always love a bargain.
