The global risk landscape is changing. Europe, the bugbear in many investors’ portfolios, appears finally to be on the mend. Volatility fell to record lows during the summer as the dark clouds of recession lifted over Europe. But, as autumn loomed, new clouds formed.
The Federal Reserve’s taper-talk and the escalation of the Arab Spring once again brought turmoil to markets. Volatility returned and investor confidence once again turned south as assets took a beating.
The Great Rotation into equities stalled as the centre of political risk shifted away from
Europe and rolled to the dual fronts of the US and Arab nations.
Then the Fed announced the delay to tapering, taking markets by surprise. Risk assets, including emerging markets, rallied, but big questions remain over the sustainability of that improvement, especially in the emerging market economies.
Early taper-talk forced investors to take note of the lack of structural reform in key emerging markets. A delay in tapering could just be a temporary reprieve. Volatility has once again become a factor in both bond and equity markets as yields begin the painful and turbulent process of normalisation.
All eyes are focussed on the Fed, not just for clarity on when and how fast the taper will start, but because the implications of a new chairperson coming on board could be far reaching.
Meanwhile, conflict in major oil-producing nations continues to affect global oil supply, pushing up inflationary pressures and dampening the prospects for much-needed global growth.
With little chance of an end to uncertainty in the short or medium term, investors need to prepare themselves for the shifting global geopolitical risks.
With sideways markets likely to dominate for some time yet, volatility should focus investors’ minds on how to protect portfolios and, where possible, take advantage of opportunities as the landscape continues to shift and change.
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