Investors are increasingly nervous. Valuations are high, volatility is low and there are plenty of geopolitical risks on the horizon. Veteran investor Jim Rogers has started to predict a major crash, and for some it’s just around the corner.
- Investors have started to worry about a crash, but markets can stay irrational
- Volatility, valuation and geopolitical risks are all troubling investors
- But there is no immediate catalyst for a sell-off
The problem is that markets can defy rationality for some time, and the cost of not being in equities – with a 4% dividend yield and some inflation protection – is high. Cash pays nothing at a time when inflation is at 2.9%. This can’t work for clients in the long-term.
What’s worrying markets? To start with, there’s the lack of volatility. Volatility in almost all equity markets is at all time lows and, for some, suggests complacency among investors. Equally, dips in market volatility have often preceded a significant sell-off. The last time the Vix index was close to these lows was in January 2007, shortly before a long and painful crash.
Nevertheless, Keith Wade, chief economist at Schroders points out that volatility is only one metric and other measures of risk do not suggest complacency among investors: “Gold, which is often seen as the ultimate safe haven asset, has performed well this year. In equity markets there has been a rotation away from the (economically sensitive companies), which benefitted from the Trump reflation trade, and back toward the high quality dividend payers….The surge in technology stocks also reflects strong liquidity and a preference for stocks which can increase earnings when top line growth is scarce.”
But valuations are not appealing in many cases. This is particularly true across bond markets, where – short of a small wobble this week – government bonds are at historically low levels, and corporate bonds are at tight spreads. It was easier to ignore macroeconomic pressures when valuations were appealing, less so when investors are paying high prices. Thomas Becket, chief investment officer at private client investment manager Psigma, concludes: “Trying to find good investments in a world of bad value is difficult. Our portfolio has had to become more concentrated.”
Equally, time is a factor. This bull market is the second longest on record. Sure, it could match the longest ever - from 1990 to 2000 – but are the conditions really ripe for that?
The difficulty is to see any real catalyst for a sell-off. Money has to go somewhere, there are precious few ‘defensive’ options. There are no obvious signs of ‘irrational exuberance’ in the market. We are all forced to be reluctant bulls.