GLOBAL - State Street Global Markets is predicting investment markets will continue to be turbulent in the coming months as recent stabilising action of the US Federal Reserve appears at odds with other central banks.
Details of a weekly research note produced by the asset management house suggest the firm's investment market ‘risk map' - which shows how investors generally move en masse - is currently at "riot point" as there have been large flows out of equity across all borders and confidence is low yet prices are still climbing at a surprising rate, suggesting institutional investors will need to see further action to restore confidence.
This time around, the firm is suggesting the time investors remain in this style of investment - usually no longer than approximately six weeks of ‘riot point' - could be longer than usual unless central banks act to improve investor confidence.
Its interpretation of the August 2007 shift from equities is institutional investors will continue to seek relatively risk-averse investments in the short-term but fixed income borrowing rates are still high and whereas the Fed was able to cut rates to try and stabilise market turbulence, other economies are unable to cut interest rates because they appear to be under inflationary pressures, so it is so far uncertain how central economies can stabilise investor sentiment.
"Clearly, investors both want and expect more from the Fed, but the Fed alone cannot revivify the easy money era," State Street notes in its paper.
"The credit crunch may have eased, but three-month euro Libor is still a measly two basis points below its six-month high, transmitting higher interest rates to borrowers, both individuals and businesses. One of the hoariest old chestnuts in the markets is "don't fight the Fed". At State Street Global Markets we don't fight the Map. It is signalling that this autumn's tumults may not be over yet, if further rate cuts are not forthcoming."
State Street describes investment markets as currently operating under a "riot point" regime because the recent flow of money out of equities indicates risk aversion or "broad-based retrenchment from equities" may merely be part of a usual end of quarter shift of assets and not necessarily reflective of true sentiment.
Moreover, current inflationary conditions suggest the US Federal Reserve is the only body in any position to potentially try and improve market turbulence because Germany has seen inflation hit a six-year high at 2.1%, China recently hit a high at 6.5% CPI, while central banks such as Norway, Switzerland and Sweden have already raised interest rates within recent weeks and have little "wiggle room", according to State Street, to persuade investors out of risk-averse investment strategies.
Immediately after the Fed cut, flows out of equities initially slowed but within the last week, cross-border equity flows into developed markets "fell into seventh percentile" along while emerging markets interest dropped too.
State Street said institutional investors tend to oppose the actions of those driving prices up in this part of the equities cycle and are so "gloomy about the macro picture that a policy reaction (rate cuts) is all but inevitable", so its analogy is "investors are riotously assembling on the streets of the City and Manhattan, demanding action" by moving so heavily from equities.
Its five-point investment risk indicator system predicts the move of wholesale markets towards ‘riot point' is usually the shortest in the cycle, at 1.5 months, before investors move into a risk-seeking leverage regime, such as shifting into Asian investments and industrial cyclicals, rather than a market neutral transition regime, a liquidity-abound market - focus on growth and shift into equities - or ‘safety first' preferences for developed markets.