Volatile markets and economies likely to for some time, says research study

Markets and economies are likely to continue to exhibit a high degree of volatility, reminiscent more of the 1970s and 2000s than the 1980s or 1990s, according to the 56th edition of the Barclays Equity Gilt Study.

Barclays Capital says in the annual research publication that current policy settings are extraordinarily easy and, if left in place for too long, will result in destabilizing imbalances and stretched asset valuations.

Investment strategies for emerging markets are also examined, concluding that equity returns are likely to continue to outperform those of developed markets. Individual regions and countries are studied for their respective risk properties and relative attractiveness.

The recent impact of rapid commodity price rises on inflation is the subject of an additional article, making the case that the disinflationary impact of low cost producers such as China and India is transitioning into an inflationary influence. As a result, the disinflationary trend of the past 30 or so years appears to be turning.

‘The Equity Gilt Study offers a unique opportunity for in-depth analysis of medium-term issues confronting investors The extraordinarily easy policies put in place during the crisis are providing a significant lift to financial markets, but at the same time they signal important risks beyond the near term,’ said Larry Kantor, head of research at Barclays Capital.

‘One of the effects already evident is a sharp rise in the prices of raw materials which, along with other factors, suggests that the 30 year trend of disinflation is ending. In the meantime, investors should continue to focus more attention on selected emerging markets, where risk return trade offs are likely to continue to be more attractive than for developed markets,’ he added.

The study says that there are significant risks associated with leaving extremely expansionary policies in place for too long. It also predicts that emerging market economies are set to continue to deliver higher growth and lower volatility than developed markets, which should translate into outperformance in emerging market equities. Emerging market debt, by contrast, has been largely re-priced, and excess returns are likely to be much smaller over the next decade.

The impressive growth of China and India is increasing demand for commodities at a rapid pace, making it difficult for technological advances to allow production to catch up with demand so it is necessary for investors to optimize investment strategies for a more volatile investment climate.

It also points out that ageing populations will reduce both stock and bond returns over time, but the excess return on equities is not as large as previously thought.