Volatility in financial markets in recent years has been at record lows. Until now, that is. Donald Trump’s ascendancy to the US presidency has introduced a new round of volatility in financial markets about which advisers need to remain aware.
Which is why Michael Furey’s presentation to the FPA conference was so timely. Furey is the principal of quantitative investment research firm Delta Research and Advisory. He has done extensive research into the factors driving financial markets.
“There’s been a lot of rhetoric around markets being volatile, but if you go back 50 years the volatility experienced in markets over recent years has been minimal,” he explains.
Furey argues markets were especially volatile in the 1970s and 1980s, at the same time inflation was high.
“What we’ve experienced recently is benign inflation and deflation has been a concern. Central bank activity has dampened volatility. There have been small pockets recently from Trump and Brexit, and a few years ago the euro crisis. But since the GFC we haven’t truly experienced volatility like we did in the ‘70s and ‘80s.”
He says inflation could be on the rise should President-elect Trump make good on his promises to increase spending on infrastructure, reflected in the latest bout of share and bond market volatility.
But the big unknown, particularly from an Australian perspective, is protectionist trade policies, such as US tariffs on Chinese goods. This could lower demand for Chinese products in the US, which could have a flow on effect to Australia and reduce Chinese demand for Australian inputs.
The question, says Furey, is how the balance will play out between the positives to come from potential increases in infrastructure spending and the negatives from protectionist US trade policies. Interest rates are the other variable that underscores the current uncertainty in financial markets.
“Infrastructure spend requires higher debt from a US perspective. But protectionist policies create economic concerns that could bring central bank interest rates back down. So there are competing forces at play,” he says.
Furey says Trump’s pro old energy and anti new energy policies will also put stresses on industries such as renewable energy. “There’s a real rotation underway where specific industries are now exposed to higher risk.”
While clean energy companies are likely to suffer, increased infrastructure spending is good Australia as it will increase demand for commodities such as iron ore.
The message for advisers is to remain vigilant to the ever-changing investment landscape. It’s also essential to fully understand the investments in which clients have an interest, in light of the uncertain investment horizon, which is likely to remain turbulent for some time.
