Volatility is expected to rise over the next few months. “This is fertile ground for stock pickers,” says David Kohl, Deputy Chief Economist at Julius Baer in our market outlook video.
Julius Baer Research considers the current environment as a Goldilocks environment. What is that exactly and what does it mean for investors?
David Kohl: It is an economic environment that is not too hot, not too cold. And this is the perfect environment for risky assets. We are coming from a deceleration of economic growth and are now moving in a phase where we see the bottom, see the recovery, and this is basically perfect.
What are the major political hurdles you see for the second quarter?
We all talk about Brexit, but there’s more to come. There will be elections in emerging market countries like Indonesia and India that could destabilise markets, and there will also be European elections. And not to forget the trade tensions – they are still producing enough noise to keep investors away. For us, when the economy is good and politics is the only thing that destabilises the markets here, it is a perfect environment to find really good investment opportunities and to profit from an improving economic outlook.
Talking about interest rates, we also have to talk about central banks. Are investors facing a new normal with regard to central bank policies?
Central bank policy in the first quarter has been interesting. It contributed to the bottoming of the economic slowdown, it contributed to the Goldilocks environment. Key central banks like the US Fed moved to the sidelines. They said, we wait and see. We see in other central banks that we still have this environment of negative interest rates, we still have an environment that is pushing investors into risky assets, and – this comes at what is basically the end of the business cycle – we have central banks that do not underwrite automatically every correction in financial markets. So central banks are both: they create opportunities in the current environment in terms of pushing you into risky assets, but at the same time they are not the same type of insurance they have been in the past, and this creates challenges in that you have to deal with higher volatility.
Could you comment on central bank policy in Europe specifically?
We think that negative interest rates will remain present in Europe. And looking for alternatives is challenging in general. In this environment right now you get quite good rewards when you go into the fixed-income space, when you look for some risk, add some risk. The compensation is nice, and this in particular important for Europe.
What about Swiss investors?
In Switzerland, the negative interest rates are even more of a problem than in the eurozone itself. So here you go for money-market-like investments, you go into the riskier space of bonds and find the right alternatives there.
You mentioned higher volatility. Can you tell us more about volatility in general? How should investors deal with it?
There is an expectation that volatility will rise. Central banks are one reason for higher volatility, they no longer underwrite everything. The other one is that we are in a rather late stage of the business cycle. This always creates more volatility. So then you look to get the right compensation for volatility and probably also find opportunities amid the volatility. Volatility means that you have frequent corrections, and these often translate into buying opportunities.
Is volatility also an opportunity for stock pickers?
Definitely. In the mature phase of a business cycle, stock pickers are rewarded. Why? Because stocks have advanced quite a bit in general and we now have to look for the winners, so this is a very good opportunity for stock pickers.
Finally, what could be the biggest surprise for investors in Q2?
The biggest surprise would be that the environment gets so good that investors even like it when the US Fed resumes its interest rate hikes. Not because we like higher interest rates but because they mean that the markets are doing well, because they are a function of a better environment, of more euphoria, of good growth.