From May to the end of June, many investors appeared to have fallen under a spell, writes Andrew Harmstone, portfolio manager for the global multi-asset team at Morgan Stanley Investment Management.
Low volatility
The persistence of low volatility is yet another factor that is mystifying investors. In our view, however, the mystery is why they would expect volatility to be high in this environment.
Even if interest rates are rising, they are still at historically low levels amid a backdrop of stable, global economic growth.
Volatility has also been dampened by reduced correlations between asset classes. We have seen the banking sector, for example, rising sharply while the technology sector has traded lower.
Decreased correlations and normalising interest rates signal a return to a normal, pre-crisis economic environment. These conditions also suggest that investment managers should see more opportunities to add value through sector selection and active management.
As the period of midsummer madness wears off, we expect to return to normalised markets where investors realise that the underlying economy is strong.
The key drivers are consumer spending and business investment, which will likely boost productivity and ultimately wages. Inflation is likely to stabilise at a healthy level as the economy recovers.
There are always risks, of course, and markets will always be vulnerable to human misperceptions. Experienced investors learn to discern between fantasy and reality and, most importantly, manage risks and seize opportunities along the way.
