“Given current expectations, we believe that even a modest turn in actual inflation could have a large market impact. We see a meaningful risk of a fast sell-off in bonds with adjustment to QE programmes being another possible catalyst.”
Investors remain positive on equities given current valuations. The impact on risk markets of unwinding QE remains a large unknown. GSAM expects “moderate but positive returns” from stockmarkets.
The US is where the greatest concerns lie. The market’s valuation in some sectors has surpassed previous boom levels. In the latest Bank of America Merrill Lynch global fund manager survey, there was a 9 percentage point increase in investors buying equity downside protection.
Asset allocators remain in a conundrum. Year-to-date performance provides guidance as to where markets might run, but diversification via fixed income and equity valuations remain the largest concern. Should risk assets suffer as monetary policy tightens, following an inflation spike, it is anyone’s guess as to where to go next.
Taha Lokhandwala is deputy editor of Investment Adviser
