Investors should brace for significant volatility in global markets this quarter, despite stocks and bonds currently treading water ahead of a week of key economic data. That includes the latest inflation reports for Germany and the U.S., providing more indications on the global interest rate path. The International Monetary Fund (IMF) will also release its latest outlook for the world economy Tuesday.
Why? It comes down to the fact that bond markets and stock markets are not singing the same tune currently.
Bonds are suggesting a long and/or deep recession. There’s a growing worry that inflation is more stubborn than expected, and this has triggered the inverted yield curve in bond markets as yields are inversely related to bond prices.
Historical Inverted Yield Curve
This is typically the sign of a coming recession – an inverted yield curve has emerged roughly a year before nearly all recessions since 1960.
On this basis, stocks look overpriced.
However, despite a wobble with the recent banking crisis, stock markets are feeling pretty buoyant and appear now to be looking past short-term inflation squalls and are seeing the endgame of interest rate hikes on the horizon.
Both cannot be right. This gaping disconnect between bonds and stocks suggests that investors should brace themselves for significant volatility this quarter in global financial markets.
The predicted volatility will create opportunities for those who are willing to take on some risk. By staying disciplined and keeping a long-term perspective, investors often benefit from periods of market volatility; indeed, they can prove to be highly rewarding.
We’re potentially looking at some serious buying opportunities for those looking to enhance their portfolios at a discount.
Diversification will become an even more critical component of investment strategies in coming months, when heightened volatility is expected. By spreading investments across a range of different assets, sectors, and regions, investors can reduce risk, protect against market fluctuations, and take advantage of opportunities for growth.
With bonds and stock markets delivering different messages about a possible recession, and its severity, investors should buckle up for a bumpy period.
But, as ever, volatility can be used as a powerful strategy to build wealth in the long-term. A good fund manager will be able to help investors choose winners and losers by analyzing market trends, conducting thorough research, achieving portfolio diversification, active management, and risk management.
London-born Nigel Green is founder and CEO of deVere Group. Following in his father’s footstep, he entered the financial services industry as a young adult. After working in the sector for 15 years in London, he subsequently spent several years operating within the international space, before launching deVere in 2002 with a single office in Hong Kong. Today, deVere is one of the world’s largest independent financial advisory organizations, doing business in 100 countries and with more than $12bn under advisement. It specializes global financial solutions to international, local mass affluent, and high-net-worth clients. In early 2017, it was announced that deVere would launch its own private bank. In addition, deVere also confirmed it has received its own investment banking license.
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