One feature of the summer months was the lack of stock market volatility, the FTSE 100 continues to jockey around 7000 and the S&P 500 close to 2150. Equity markets in the US remain close to record highs, however sentiment towards this asset class appears to remain cautious. A clear example of this is the difficulty companies are having getting the valuations they hope for when listing on the stock market, other public offerings are being pulled due to lack of support. We have pointed to another example of lack of equity support as the Financial Times reported that almost $100bn of capital has been withdrawn from European equity funds so far this year. Bonds, commodities and equity markets have risen this year, after such an uncertain start in 2016, possibly reinforcing the believe that markets climb a wall of worry.
It is possible that we are reaching the peak of the liquidity cycle as the Bank of Japan is retreating from its negative interest rate stance and the Federal Reserve is likely to raise rates later this year. Accordingly, yields on major developed bonds have started to edge higher; in the past quarter, this change in rate sentiment has led to a shift away from the defensive bond proxy sectors such as the utilities, telecoms and consumer staples. This extended period of low interest rates has led to the long run price relative of real assets (commodities, houses, collectables) relative to financial assets (stocks and bonds) is currently at its lowest level for 90 years according to a Merrill Lynch report.
At some stage history tells you that the performance of real assets and financial will adjust. The question is maybe; will this happen as financial assets fall or will the value of real assets rise? Merrill Lynch go on to point out that the other times in the past century when the trend of financial assets over real ones have started to reverse has coincided with a war of some description. World war 11, and the war on poverty in the 60’s. Let’s hope that as tensions rise between the US and America this will not be the cause of the next rotation.
Governments seem driven to lower the value of paper money with policies such as quantitative easing. It was not many years ago that many analysts suggested that all QE would do was drive up the value of real assets. As is the case with most analysts forecasts so far they have been proved wrong. If governments re successful in creating inflation and lowering the value of paper money, that’s when real assets will come back into vogue.