moneyIn the world of delayed interest rate hikes, equity markets continue to offer the best investor returns in the short-term.  It is a simple matter of a lack of credible investment opportunities.

This scenario is not likely to change much over the next few months, even if interest rates do edge up in the United States (the only investment market where there is a threat of such an event).  The reasons are simple:

  • – there is little inflationary pressures around the world to require a big move up in interest rates;
  • – employment markets in the majority of countries are no-where near full-employment levels, so there is no wage pressure;
  • – even if interest rates do rise, relative interest rates remain at material historic lows.  The rate rise will be marginal on a relative basis, and will be local (not global);
  • – only one economy shows any real sign of recovery – the United States.  All others (including China, Europe, Canada, and Australia) are facing challenges to growth.

This is not to say that there will be an absence of volatility.  On the contrary, volatility will remain intense and will challenge investor resolve.  Smart value investors will use this volatility to capture short-term gains on their long-term favoured value investments.

The biggest challenge in the short term for all investors lies in the bond market.  This market is going through a tremendous period of uncertainty, driven in the short term by daily speculation on U.S. rate rises, and encouraged by the authorities and market pundits.   This situation presents overall market risk – ie. liquidity flows in this investment market could spark a short-term panic or crisis of sorts if not restrained by rational long-term investment strategy.  Much as a sudden, massive equity market sell-off (driven by liquidity) can create severe short-term investor (and policymaker) anxiety, so too can such an event in the fixed income market.  The fact the fixed income market is a less visible one day-to-day for the average investor can make such an event appear ‘unexpected’, and hence concerning.

Of particular note, revelations of scandal and market manipulation by big players in investment markets (such as today’s massive fines applied to several global banks for manipulating foreign exchange markets, or past manipulation of LIBOR markets) do not instill confidence that all long-term investors are behaving rationally.  Could the same activity be occurring in fixed income markets?