Following a decade of stimulus, investors are looking to the future and wondering what life will look like [in the industry] after this period of easy money, according to Michael Metcalfe, global head of macro strategy, State Street Global Markets, and Bill Street, head of investments for Europe, Middle East and Africa (EMEA) at State Street Global Advisors.
Metcalfe and Street discussed life after ‘easy money’ as one of their topics at this year’s State Street mid-year global market outlook.
Street explained that investors are getting anxious because they are not necessarily going to get the double-digit returns in their portfolios, as before, but this is actually normal.
He added that it is not actually normal to have consecutive years of double-digit returns.
According to Metcalfe, the demand that flowed into the asset management industry last year was at an unusually strong rate.
Due to this good run before, we are now seeing this normalisation behaviour in asset markets, Metcalfe explained.
He added: “We have had pockets of extreme volatility in markets and places such as the Italian bond market.”
According to Street, financial markets have behaved quite warmly and there is a bigger point about how central banks are reacting and growing appreciation because of where the inflation rate is.
In consequence, central banks aren’t going to be able to come back in and sway markets, he explained.
“We need to normalise”, Street advised, “and to normalise means normalising policy stimulus, etc”.
Street commented: “Normalising in terms of returns and normalising in terms of volatility, which means normalising risk adjustment in terms of the investor’s portfolio risk-adjusted returns have been very high because volatility has been incredibly low.”
He added: “The challenges mainly revolve around the expectation of momentum; over the last few years this momentum of returns has continued, therefore it has caused a reaction where investors think if that does not continue then it is going to be disastrous.”
Meanwhile, there is actually a middle ground where markets normalise and get their expectations and policy aligned, and volatility will increase—not all volatility is bad, Street noted.
Street concluded: “Ultimately, we are in this transition period where all this easy money is going away and markets are adjusting, and in time so will clients.”
