Share markets are up, but risks remain

Investors have earned good returns from equity markets over the past quarter. But fund managers say there are risks, the most important of which is what will happen when central banks tighten their monetary policies and start to raise interest rates. repo

THE financial markets were good to investors in the third quarter, with the JSE reaching new highs, largely on the back of buoyant markets globally. However, conditions are still far from normal, with ongoing stimulus by central banks, geopolitical tensions and high share valuations fuelling concerns that the markets are overheated and due for a correction.

In the October “Fundamentals” newsletter of the Old Mutual Investment Group, strategist Nic le Roux comments that September was a very good month for global equity markets.

“The US S&P 500 Index rose 1.9% and closed the month at a new record level. The German Dax fared even better, surging 6.5%, almost fully reversing a similar-sized decline over the previous two months.”

Le Roux says this good performance came in spite of a number of developments that one would normally expect to cause concern among investors, including worries about the tensions between the United States and North Korea, indications of “policy normalisation” by central banks (by, for instance, upping interest rates) and some signs of an economic slowdown in China.

“The fundamental reasons for the strong equity-market performance are likely threefold.

“The first is the growing confidence that the global economic recovery not only remains on track, but is spreading around the world.

“The second is that investors see central banks’ willingness to push on with policy normalisation as a sign of growing confidence that the global recovery is becoming self-sustaining. The third is that it appears there is renewed hope that the postponed tax reform and fiscal stimulus in the US is back on the agenda,” Le Roux says.

But he says that you should never lose sight of the risks that still exist. “The most important is that investors may be too complacent about the extent of central bank policy tightening.”

If the central banks increase interest rates too quickly, it will negatively affect the markets. However, they are unlikely to make any unexpected moves, and those they are expected to make are probably already reflected in asset prices.

“The next few months will tell whether the markets have priced in too much good news. In the meantime, we remain positive on the outlook for the world economy, as we have been for some time, with no serious headwind in sight that could derail this outlook,” Le Roux says.

Nick Curtin, the head of business development at Foord Asset Management, is very aware of the risks in the markets and stresses