With both volatility and asset correlations near all time lows...
... and complacency dominating across all global markets, one BlackRock money manager warns that investors should probably be a little more nervous.
Even as the recent stock surge and below-average volatility show investor optimism is near all time highs, markets are underpricing global political risks, said Russ Koesterich, who helps manage the $41 billion BlackRock Global Allocation Fund.
Why is Koesterich worried? The price of gold, which has failed to validate the prevailing calm, in fact just the contrary. Bloomberg reports:
Looming elections in Europe and political uncertainty in the U.S. are among developments that could shift investor sentiment, Koesterich said. Adding to the threat is the potential impact of Britain’s exit from the European Union and a debt crisis in Greece. Such concerns have helped boost haven demand for gold, which has climbed almost 8 percent this year after posting the worst quarter since 2013.
“That hiding political risk is not reflected in markets,” Koesterich said in a telephone interview Thursday. “People are not that nervous, and there are things that could go wrong, particularly when you think about all of the political risks. That adds to the argument for having gold in a portfolio.”
As a result he recommends gold as insurance. Validating his point is the recent drfit higher in gold which has decoupled from VIX, and as of this morning was trading at three month highs, up 0.3% at $1,242
"Some of this rally has been based on the fact that investors expect some stimulus from Washington in the form of tax cuts and potentially fiscal stimulus as well,” Koesterich said. “What happens if it doesn’t come?” While “there will be some stimulus, the timing, the form and the magnitude are still very much uncertain.”
In the U.S., stocks this week posted the longest rally in three years, inflation indicators have risen and the labor market is strengthening. At the same time that a gauge of global economic policy uncertainty climbed to the highest on record in January, suggesting something has to snap.
“Some of this rally has been based on the fact that investors expect some stimulus from Washington in the form of tax cuts and potentially fiscal stimulus as well,” Koesterich said. “What happens if it doesn’t come?” While “there will be some stimulus, the timing, the form and the magnitude are still very much uncertain.”
Those who are buying gold - despite the recent jump in market-derived inflation indicators - already have their answer.