Last Monday, we commented that, “Global equity markets moved higher again last week with the S&P 500 Index reaching its forty second all time high for the year to date. At the same time, implied volatility (measured on the VIX) remains near record lows. It still leaves us feeling a little nervous – especially as the last significant market correction was so long ago.” Here we are, a week on, and that sums things up equally well today.
We also noted last week that, “Economically, the world still seems to be in good shape and it is this background that is giving investors confidence.” This message, too, has been reinforced by comments from the International Monetary Fund (‘IMF’). The Fund’s Chief Economist, Maurice Obstfeld, said last week that the current acceleration in global growth is broader based than at any time over the past 10 years. The IMF increased its forecasts for economic growth for 2017 and 2018 to 3.6% and 3.7% respectively. With inflation remaining largely under control, there is every reason why investors should be confident. Confident but not complacent.
We are still concerned that such low levels of volatility may have led to complacency and to positioning in risk assets that might not otherwise have been taken. This has the potential to unwind fast if a ‘risk off’ mood prevails. If it does, a short, sharp shock might result. So prudence remains the watchword – recognise that short term returns may be limited and that short term risks are likely to be higher than is priced in.
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