On edge

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Investors are increasingly on edge as various signals suggest that times are changing. With tapering on auto pilot, focus is now shifting to the Fed’s first rate hike. Was Janet Yellen’s suggestion that there would only be a six-month period between the end of the Fed’s quantitative easing programme and the first rate increase a slip of the tongue or a deliberate gauging of the market’s reaction? Investors weren’t amused and appreciated her subsequent dovish clarification. Same story in Europe where the ECB’s ‘no change’ was met with disappointment until Bundesbank chief Jens Weidmann spoke of the need to temper the euro’s strength.

‘On edge’ manifests itself in ways other than jittery reactions to central banker’s statements. There is increased sensitivity to valuations; witness the corrections in US small caps, tech and biotech valuations after their great run, and the rotation into safer value stocks. Talk of bubbles in social media stocks, in corporate bonds or even in equities exacerbates the state of edginess. However, just as markets exhibit momentum, so do the themes being pursued by newspapers. So ‘expensive’ should not be confused with ‘bubble’.

‘On edge’ also means seeking and finding opportunities in markets previously considered unattractive. The renewed appetite for emerging equities is a case in point. Interestingly, there is no global macro catalyst at work but different country-specific developments suggest that emerging markets may be making a comeback. Admittedly, emerging equity markets should be considered as the final frontier for value. For the rally to last, earnings growth must pick up. In that sense, their challenge is no different from that faced by developed markets.

William De Vijlder

Group Chief Economist

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