Will Bartleet, CIO and Portfolio Manager of Pacific Multi-Asset
A winter storm is blowing through markets
After months of mild weather, a winter storm is blowing through markets. First it was government bonds that sold off as investors finally took the threats of central banks seriously, stirred by signs of rising wage pressure.
Investors had previously rejected the Federal Reserve’s forecast of six rate rises over the next two years, with the market pricing in just two hikes at the start of the year. Now expectations have been brought more into line with interest rate futures now indicating four or five raises. This has pushed 10 year treasury yields to their highest since the end of 2013.
Next to get knocked back by the gales were equity markets. The US stock market had been enjoying the longest run without a 5% correction since the 1950s only to fall over 4% in a single day. At times like these, investors look around for who to blame, and this week there has been finger pointing at short volatility funds. We are more focused on how to take advantage of this volatility. Whilst the recent spike in volatility is unusual, the extreme calm of the last few months is much more abnormal.
Within our funds we significantly reduced the sensitivity of our portfolios to rising interest rates throughout 2017 and we have been raising cash over the past few months. Our structurally lower allocation to equities and tilt towards value has also been helpful over the last few days. Falling markets are uncomfortable, but they do throw up opportunities; we expect this bout of volatility to be no exception. We will keep our investors updated over the coming days and weeks.