Investment managers have raised alarm over the complacency of markets as the FTSE All World index hits record highs.
The FTSE All World, which has a 50 per cent weighting to the US, has risen 21.9 per cent over the last year, and 8.1 per cent since Donald Trump won the White House in the US election just over three months ago.
Its previous all-time high was in May 2015.
Dave Jeal, head of investment products at stockbroker Interactive Investor, questions how long indices on both sides of the Atlantic can continue to rise. The FTSE 100 closed Wednesday just above 7,300.
“Presidential tweets have the potential to cause alarm, and his latest run in with his security services will continue to cast a shadow over US-Russian relations.
“The Brexit trigger looks set to be pulled to plan. French and German elections might throw-up a scare: any signs of EU fragmentation will worry already nervy markets.”
Thesis Asset Management’s Michael Lally believes the “classic indicators” of a market about to correct are in place.
“[There is a broad acceptance amongst the participants that, although prices might be looking a little stretched, not to worry because the momentum is strong, the economic backdrop is supportive and the alternatives are even more expensive or unpalatable,” Lally says.
Lally says investors should look to debt markets for the first sign of storm clouds.
With a constant flow of new funds to invest, Lally warns asset managers could become distressed buyers.
Hermes Investment Management chief investment officer Eoin Murray says currency volatility right now is much better at tracking uncertainty. “Currency markets are a lot more fearful than equity participants right now.”
In equity markets on the other hand, Vix is in the bottom percentile of its history, Murray points out.
“Currency markets have a much broader, diverse group of participants. It’s not just investors; it’s people doing business from geography to geography, it’s producers, it’s the central governments themselves.”
Murray adds: “To some extent you’d say greater diversity leads to less chance of a herding effect and everyone missing the big elephant in the room – or ignoring it.”
Inflation rising faster than expected or the the US Federal Reserve raising rates more than twice this year could shake investors out of their complacency and prompt a correction in equity markets.