Remarkably, this environment translated into clear outperformance for commodities, more volatility than direction in developed equity markets and only modest underperformance in emerging market assets. Stressing that we live in uncertain times has long lost its shine as an excuse for temporarily misunderstanding markets. Yet it is prudent to explore less “fundamental” reasons for the behaviour of investors over the last three months. 

In the complex system of global financial markets there is no stability in either the set of driving factors of markets or even the direction of causality between the real economy and markets. Sometimes market dynamics are the consequence of investor behaviour that follows from their shifts in sentiment, management of certain accumulated portfolio concentrations (squaring strongly overweight or underweight positions) or the dominance of certain types of investors. With respect to the latter, high frequency traders, pension and insurance money managers or sovereign wealth funds might all respond very differently to the same set of evidence on the ground. Depending on their relative importance at a certain point in time, they can create different market responses.

Given that many active players in the market had built up a concentration of similar positions in the latter part of last year – being long equities and short real estate, emerging markets and commodities – it does indeed seem most likely that it was much more investor risk/position management than a genuine shift in underlying fundamentals that explains the market evolution during the past quarter.

Combining this assessment with our conviction that fundamentals will not be ignored indefinitely, we re-adjust our allocation stance somewhat in those areas where new investor trends seem to be strengthening. At the same time, we also hold on to our longer standing overall risk-on tilt as the increasing visibility in the underlying momentum of the cyclical recovery in developed markets continues to provide solid support. 

It seems however that, after a period of position squaring and with government bond yields bottoming out, the opportunity pendulum has shifted back towards equities, while the prospect of (moderately) rising bond yields makes the upside in real estate somewhat less than before. Elsewhere, it was mainly the reduction (not elimination!) of near-term tail risk surrounding the Crimea crisis and the Chinese growth slowdown that conspired with significantly improved investor appetite for emerging market assets. These moves are too strong to ignore and have made us more positive about emerging markets in the short term. It does however not take away our medium-term concerns over the macro imbalances and lack of structural reform to facilitate the transition to new growth models. 

For the current quarter, it nonetheless seems that market dynamics can be assessed a bit more easily. However, it also seems that there is only one thing which is more difficult to forecast than the weather – and that is the behaviour of investors.