This certainly proved to be the case in calendar year 2016. The pro-bond and ‘safety asset,’ growth-pessimistic environment of the first half of the year reversed sharply in the middle of the year – well before Trump.
The big issue for investors from here will be whether this reversal was simply the unwinding of a short term episode or the starting point of something more profound; a genuine shift in the multi-year and even multi-decade return environment.
This week, and last year, Tony wrote about how the high starting point of yield and the structural decline in inflation and interest rates since the 1970s set investors up for a multi-decade period of government bonds delivering returns more commonly associated with more volatile assets.
This intensified with the financial crisis and supported investors who, mentally scarred by that experience, had an obsession with minimising volatility and drawdown. As Tony noted this week, the result has been an environment in which being cautious has actually been rewarded.
Many who have held assets for their ‘safe haven’ properties have instead been gifted with ‘growth-like’ returns. This has made it easy for even traditional static multi asset allocations with high bond weightings to look like deliverers of ‘risky returns without any risk.’
The second half of last year was a challenge to these strategies, as some bonds displayed higher volatility and even some sharp losses. Investors who panicked amidst the recession fears of January and February, or fell into the trap of forecasting in response to the Brexit vote or Trump’s victory often compounded these problems.
How does this view on a pivotal moment differ from a forecast? Importantly, it is built on what I am observing today: the late-cycle ‘blow off’ nature of the bond rally in H1, the capitulation in beliefs, and the extreme growth pessimism, all of which set markets up for a surprise. At the same time we have seen genuine macro improvement and challenges to the policy regime – of which Trump is just a symptom.
In the meantime, shorter term volatility will also provide opportunities for disciplined investors. The key is to stay focused on big issues such as regime in order to know how best to respond in such testing moments.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.