- Quarterly investor insight
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Lasting change for the global economy
After a volatile first half of the year, markets have behaved in a more sanguine fashion since June. The VIX index, a key measure of volatility, anticipating price moves in the S&P 500, shows that while volatility remains higher than it was before the pandemic, it has fallen significantly from its highs (see Figure 1).
Asset performance has been remarkably favourable. The global equity index ended September close to its prepandemic highs, though most of the gains are attributable to a handful of well-known technology stocks. This sector continues to surge higher, despite concerns over demanding valuations causing shares to correct from time to time. Some areas of the market have benefitted less – the energy sector remains over 40% below the February peak, on account of a weak outlook for oil demand. Other cyclical areas, such as industrials and financials have also lagged.
Within bonds, yields on government debt have fallen in all developed markets and across all durations, signalling that investors are willing to accept lower returns for a perceived safe-haven asset. This has had a ripple effect up the risk spectrum, causing bond yields to fall in the corporate space, too.
Lower bond yields also impact other areas of the market. For equity analysts, for example, they lower a key variable used to discount company earnings in their financial models, which magnifies the present value – or what analysts are willing to pay today – for a share of future earnings. This has helped sectors of the market where a greater emphasis is put on long term earnings growth – such as the aforementioned technology sector.
With bond yields tight and certain areas of the market richly valued, what are the factors driving growth from here and how are we approaching valuation?
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