The market environment since the financial crisis has been characterised by accommodative monetary policy, low interest rates and periods of risk aversion.
Investors have been preoccupied with capital preservation and negative correlation with risk. Until June 2016, this focus was rewarded with equity-style returns in many government bond markets. But in the past 12-18 months, many bonds have started to deliver the returns implied by their real yields. We are now in a world where investors realise that to make a return you must accept cyclical economic exposure and equity volatility.
The recent pick up in bond yields on concerns of higher inflation and tighter central bank policy unnerved investors and triggered a rise in market volatility. But this is not a reason to panic – periods of volatility, where valuations become more attractive, can provide opportunities for active, long-term investors. The net effect could be a more normalised and favourable environment for skilled managers.
The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested.