Three quarters of the way through the year and the market backdrop is as confused as ever. Is this the new normal? There is certainly a lot of noise in the system. Mixed signals over the pace of economic recovery have meant that equity markets are struggling to break even, with fewer up months this year than down months.
Bond yields have plunged to new lows, discounting deflation into the future and raising some questions of bubble-like behaviour. Thanks in part to continued investor flows to this area, corporate bond markets have recovered to remarkable levels; IBM and Microsoft recently raised three-year debt at rates of 1% and below. Currencies are all over the place, often with seemingly limited fundamental justification. It is not surprising, then, that attendees at the recent Denver Gold Conference were in an upbeat mood, with the precious metal price surging to new record highs.
What is perhaps certain is that investor behaviour has changed, post-Lehmans. There remains a high degree of risk aversion. There have been limited flows into equity mutual funds in developed markets, despite supportive fundamentals such as strong profits, de-risked balance sheets and high dividend yields. Our equity team reports that that it is increasingly seeing a withdrawal to the sidelines and cash rather than rotation into defensive areas of the markets, when sentiment sours.
The collapse in bond yields signals that investors are demonstrating a preference for buying perceived safety at the expense of any reasonable return prospects. Short-termism is rife.
Our investment managers have stuck to their guns in the difficult months and focused on the medium-term outlook. While I still believe strongly that this remains a market for active management, a focus on valuation metrics, thematic drivers and understanding market sentiment tends to pay off.
Of course, an understanding of investor behaviour is key. Behavioural finance or economics is an insight into the impact of social and psychological factors on traditional economic theory and decisions. As such, it is not a new field of economics but one which commands more attention in an environment often driven more by emotion than logic.
Peter Bourne is the managing director of Ashburton.
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