Global Markets Review
Volatility surged in February as rising real interest rates sparked dramatic sell-offs in equity markets. The DJIA posted its largest one day ever point loss as the VIX index jumped to levels not seen in nearly 2.5 years. Global stock markets tumbled but recovered somewhat towards the end of the month. USD was mixed - gaining against European currencies but losing ground to JPY.
Building inflationary pressures and perceived hawkishness from the new Federal Reserve chairman also added fuel to the fire as US 10-year treasury yields rose to a 4-year high.
Commodities returned mixed results in February as energy and metals retreated whereas softs and grains moved higher.
This resurgence in volatility has served as a wake up call to investors and managers alike, who seem to have been lulled into complacency and overconfidence by the tremendous run of the market over the last few years. This rally was accompanied by the longest spell of unnaturally low volatility which has served to exacerbate the situation. This complacency is underlined by the hugely overcrowded trade shorting VIX. The epitome of this was the ETN issued by Credit Suisse which collapsed last month taking along with it the saving of many short sighted speculators and most of the bank's second half earnings.
The situation is beautifully described by one of the most successful trader of all time, Paul Tudor Jones, who in a recent interview with Goldman Sachs likened the situation of the new Fed Chairman with that of General Custer before the Battle of the Little Bighorn.
The whole situation is being further stressed by new tariffs on aluminium and steel imports announced by president Trump and the precarious political balancing act in Italy.
In all, the condition of the markets seems to have turned the corner from the era of easy money. Easy not only in terms of central bank policy but also in earning extraordinary returns with little or no knowledge and understanding of the investment discipline. For the last few years all one had to do was buy an ETF and go to sleep. Looks like this ends here. Not only will making money require knowledge skill and discipline, but worse, it will become quite hard not to be losing the winnings racked up over the last few years. This is the time for true alpha generating investment management and alternative strategies.
Emerging Markets: India
The equity market was fragile this month on account of worries over global trade war, tax on long term gains and the ever increasing concerns over the robustness of the Indian public sector banks. Allegations of fraud in PSU banks and big companies have kept the investors nervous. This has also led to increase in the yields of government bonds. The macro data however provides a silver lining, India’s GDP grew 7.2% in the final quarter of 2017, surpassing expectations and wrestling back the mantle of fastest growing economy from China. Index of Industrial production (IIP) growth rose higher than expected to 7.5% in January from 7.1% in the previous month indicating that the adverse impacts of GST and demonetization are wearing off. Simultaneously Consumer Price Index (CPI) showed a further decline in retail inflation to 4.44% in February from 5.1% in the previous month thereby reducing concerns on inflation for the RBI. [Source: Financial Times]