17th July 2015
Global economies face three main challenges that are all very different, according to Anthony Rayner, co-manager of Miton’s multi-asset fund range.
Rayner has identified the ‘cracks in the eurozone project’ as the first challenge, Chinese asset bubbles bursting as the second and the raising, at some point, of US interest rates.
‘These challenges are very different but they have a number of important factors in common,’ he said. ‘At the centre of them all lie the authorities, whose key short-term objective is to avoid material capital loss to the extent that it threatens financial contagion in the first order and economic contagion in the second.’
He said the three reasons were the reason for recent market volatility, although noted the eurozone and China has the additional dimension of political risk which made it hard to markets to price.
‘However, one thing is ‘normalised’ volatility and another is when markets dislocate,’ he said. ‘So far, financial markets have responded to events in Greece and China in a fairly localised way, with contagion pretty limited.’
While Rayner stressed that volatility was not a bad thing, he said it had been capped by quantitative easing and volatility now increasing ‘might not be so bad’ as QE programmes are exited and ‘economic risk is perceived to have subsided in certain countries, such as the US and the UK’.
Although volatility increasing may not be too much of a problem, Rayner said that central banks are ‘increasingly contributing to financial market stress’.
‘Some of the more recent surges in volatility, rather than being dampened by QE may well have been encouraged by QE, as market participants position themselves to benefit from well-flagged QE policy to the degree that it leads to herding behaviour into crowded trades and, ironically, instability in markets,’ he said.
Overall, he said the mix of risks has ‘shifted from economic health to financial market health’.
‘What does this mean for our portfolios?’ he said. ‘In an environment where markets are lurching from risk-on to risk-off on an almost daily basis it can be difficult to make sense of how asset class behaviour is changing and the degree to which the relationships between asset classes are changing.
‘However, understanding the risk environment in this way forms a very important part of trying to ensure we have a truly diversified portfolio. More generally, ahead of the dust settling a little, we’re happier observing, rather than acting.’