The 2008 credit crisis, the current sovereign debt crisis in Europe, and the unstable global political landscape places market volatility top of mind with asset managers and investors. Again this year Principal Global Investors has partnered with CREATE-Research to publish a very timely report, Market Volatility: Friend or Foe?. This year’s report, which focuses on volatility, is especially important considering the last four years have been some of the most volatile in the history of global markets.
Why have the markets disconnected from economic fundamentals? The sovereign debt crisis is a major reason in the West. This was caused by governments taking on debts and bad assets from financial institutions during the financial crisis, and by fiscal stimulus packages rolled out by governments to prevent a recession. In addition, many new financial regulations have been announced, some of which are creating unintended consequences in the markets. No wonder then that all eyes are on politicians and policymakers these days.
Another factor is the 24-hour news cycle, which amplifies mood swings in a country or region, spreading those sentiments instantaneously around the globe. Someone sneezes in Spain, and all of Europe has the flu.
With volatility comes opportunity. In future blogs, I will explore how investors are adapting to this new world order.