On Friday night Janet Yellen reiterated that US interest rates are likely to rise again this year. But stock markets don’t seem to care. Interest rates have risen a little, the Euro sold off and the US dollar strengthened.
But equities, they just keep on keeping on.
It’s a market reality that has many long term investors worried.
Worried that the complacency born of central bank quantitative easing has led to a reduction in meaningful risk management by investors and portfolio managers.
That’s a worrying situation according to new research from Schroders Investment Management. David Wanis, senior analyst and fund manager, wrote that there is a distinct lack of fear “due to aggressive global central bank policies”.
He believes this has now led to a “hostile” investment environment:
It is often after a period of low risk (high returns, limited losses) that investors start to question the value of risk management. As markets continue to deliver consistent and abundant returns, anything left on the table in the name of prudence comes under scrutiny. As the passive alternatives – either at the stock selection or asset allocation level – gain increasing exposure to momentum any philosophy that believes trees cannot grow to the sky (value based, contrarian) will almost by definition be left behind.
It is a great irony for those who experienced 2007- 2009 that we are in the position we are today. Re-leveraging, reaching for yield, feeling angst at investing with one eye on risk because of the points left on the table. The most extreme equity valuations observed for the least proven enterprises. Narrow spreads for the most risky of debts – made riskier by financial engineering. Risk appetite driven to off the chart levels, underwritten by confidence in the ability of central banks to suppress volatility and propelled by investor concerns over ‘peer’ risk all leading to a market absent fear.
Wanis suggests we take cover “before something unexpected and potentially unpleasant happens.”