Are We There Yet?
The focus is definitely on Europe as it remains to be seen whether problems there will result in another crisis or perhaps even spawn a new global recession. And, if that wasn’t enough to worry about, investors are still concerned about a slowdown or bust in China and the developing world, which has essentially been the key source of global growth for the past few years. In this case, ‘there’ would be the point of despondency that marks the trough in the graphic shown here.
Recent market activity has resulted in more risk-averse investors being the most handsomely rewarded, and we use that term rather loosely given the low interest rates currently offered on deposit accounts and savings product (including GICs). What happened to the whole concept of risk versus reward, whereby those who took on the most risk were the ones who earned superior returns? Is it not a perverse situation when investors are willing to accept a negative known rate of return, as occurred when US T-bills posted negative yields and yet continued to attract buyers? This seems to be the risk investors are willing to accept in order to avoid the greater volatility of equity investments.
In fact, gold seems to be the only asset to generate decent positive returns amidst all of the market turbulence of the past three years, but gold offers no yield or earnings and so its valuation is largely dependent upon the relative supply-demand situation. This makes it vulnerable to major price swings, along with most other commodities. Obviously, commodity prices are a real concern for Canada and Canadian investors, who tend to have more than global market representation in the way of exposure to the domestic equity market.
Heightened market volatility seems here to stay and this is one of the few things that we feel pretty comfortable stating without the benefit of hindsight. For those investors who can handle the rollercoaster ride, we think the current environment might very well represent a buying opportunity for those who want to augment their equity exposure at greatly reduced prices. Certainly, the current equity market selloff could very well go on, but we think it’s quite possible that we are ‘there’ and markets could see some upside from here. At this juncture, credit, economic and market conditions just aren’t anywhere near as dire as they were in mid-2008, before the crash took place.