At the start of this year, investors were prepared for a potentially volatile and unpredictable year for equities and bonds alike.
President Donald Trump was set to take charge in the White House, the UK government was about to trigger Article 50 and begin negotiations to leave the EU, and Europe faced a series of elections in which populist parties stood to gain ground, and perhaps even power.
Eoin Murray, head of investment at Hermes Investment Management, suggests 2017 has been an unusual year in that “political uncertainty scaled new heights, but equally one in which volatility – across all asset classes – has been extraordinarily low”.
The year has so far been characterised by this dichotomy, with the FTSE 100 and the US flagship S&P 500 index climbing higher, while volatility remains near record low levels.
Tilmann Galler, global market strategist at JPMorgan Asset Management, says: “On May 8 the Vix [known as a measure of S&P 500 volatility] closed for the first time in more than 10 years below 10.”
Mr Murray adds: “At the same time, correlations appeared to have entered a new era, whether we are talking across geographies, across asset classes, or even within asset classes – everything has started to behave differently. This should be good news for active managers that can combine boldness with skill.”
At the halfway point in the year, equity and bond markets have taken slightly different courses in response to political events and central bank action.
But Steven Andrew, multi-asset manager at M&G Investments, acknowledges: “So far in 2017 most financial markets have managed to navigate a fairly successful route through what could have been an inhospitable landscape.
“Even though there have been several potential causes of volatility, such as elections in Europe and higher interest rates in the US, equity markets have enjoyed steady appreciation, led by Asia ex Japan, emerging markets and Europe. It appears investors are finally prepared to accept that the global economy is growing, as signalled by a host of economic data and better-than-expected company profits.”
He adds: “By contrast, government bond markets have lagged, with some, such as Germany, being down year to date.”
But by and large, fixed income has once again confounded the bleak predictions being made for the asset class at the start of the year.
The most notable performance in the first six months has come from emerging market and European equities.
Now is certainly not a time for investors to become complacent as political risks could still come to the fore, not least in the UK where the threat of fresh elections hang over the start of Brexit negotiations.
“History teaches us that phases of low volatility don’t usually persist very long,” Mr Galler says.
“Weaker growth in China because of monetary tightening and a disappointing growth recovery in the US are risks for the market going forward.”
Neither is it a time for “heroic bets” in a portfolio. Mr Tiller notes: “A broadly diversified portfolio with a slight tilt to equity risk is still preferable in this environment. In addition, very flexible and market neutral investment strategies should get more consideration.”
Ellie Duncan is deputy content plus editor at FTAdviser
