The recent sharp correction of equity markets and the increase in yields which have materialized since the start of the year have created a turbulent phase, interrupting the “Garden of Eden” kind of setting which investors were getting used to.
The VIX index spiked above 37, a level not seen since 2015. All this came after a very rewarding year for investors. In 2017, the S&P index recorded a positive performance in almost every month of last year in a context of exceptionally low volatility. Eighteen out of the 20 lowest levels of the VIX of the last 20 years were printed in 2017. Market complacency led many investors to ignore the extreme valuations alerts and to enter overcrowded trades. After the sharp correction in the equity market and the realignment to higher inflation expectations for yields, the main investor question is: Are the unique conditions which have supported the long phase of asset inflation set to continue? We expect the synchronised global growth scenario to hold, even accelerate, with some good news from capex and a rebound in global trade, but Central Banks (CB) outlooks are becoming more challenging. CB have played a powerful role in the “Goldilocks narrative”, and a potential withdrawal of the ECB or the BoJ from their massive stimulus programmes – no longer consistent with strong economic conditions – could trigger other episodes of turbulence in the market. In this respect, volatility was clearly absent in 2017 and market complacency partly influenced investor judgement.
