SINGAPORE (June 25): State Street Corporation advises investors to start adopting a more defensive stance on expectations of global volatility in 2H18, as the environment becomes more challenging for risky assets such as such as global equities, high-beta developed market currencies, and emerging markets (EMs) in general.

In a Monday release, Lee Ferridge, head of Global Macro Strategy for North America at State Street Global Markets, says he foresees rising inflation and falling liquidity to create a challenging environment for risky assets going forward.

“Despite lacklustre fundamentals in the post-2008 world, markets have enjoyed strong, persistent gains. This dichotomy has been created by central banks, as global quantitative easing (QE) has created excess liquidity, pushing investors into ever riskier assets. Now, however, this environment is ending. During the remainder of 2018 global central banks will be removing, not adding liquidity,” explains Ferridge.  

Based on the State Street PriceStats inflation index – a daily measure of prices posted to public websites by online retailers – he observes that the path of online prices in the US is veering towards one of the strongest seen in the past five years.

This means that even with modest price rises in the next three months, headline inflation is likely to reach 3%, says the head of strategy.

With the Fed signaling a more aggressive rate path by adding a fourth hike to its 2018 outlook, Ferridge expects the change in monetary policy to have significant implications for all investors.

Recalling equity market volatility, rising global yields and sharp declines in emerging market (EM) currencies as seen in early February this year, he believes these events are likely to be “just a warm up for the main event” – which is the continued rise of volatility across asset markets.

Dwyfor Evans, head of Global Macro Strategy for Asia Pacific at State Street Global Markets, notes that stresses in EMs are becoming more evident, especially among countries with current-account deficits such as India and Indonesia.

Nonetheless, Evans sees select undervalued opportunities among EMs such as in Malaysia, which he expects to remain supported by higher commodity prices, trade surplus, attractive valuations and high absolute rates.

“Investors should also be aware that the high level of divergence between equity and currency turbulence will not last forever. Indeed, currency volatility has been increasing and is currently at its peak since August 2016. We therefore believe there is an increased need to hedge currency exposure for USD-based investors,” concludes Ferridge.