When speaking to investment professionals in recent months, more often than not one of the first words out of their mouths is ‘volatility’.
This is then followed by an explanation of either how they intend to insulate their portfolios against it, or on the other side of the coin, make short-term bets and capitalise on upcoming market swings.
However, for Coombs, Rathbones’ head of multi-asset investments, the market is not paying enough attention to what he believes is a far more serious risk, and may inadvertently be wandering into a crisis.
“We are in a very difficult investment environment, both from a regulatory perspective and in terms of macro policy,” he said. “Liquidity is the biggest risk that we face over the next few years, particularly for income strategies.
“Often illiquid asset classes have very low volatility, yet the marketplace is spending so much time focusing on volatility. It is very worrying, and is setting the industry up for a fall.”
While the phrase ‘hunt for yield’ has been applicable since the dawn of trading civilisation, in recent years it has become increasingly apposite as the bond pressure cooker continues to boil.
This has subsequently sparked bouts of volatility in asset classes – such as German bunds – that were previously viewed as ‘swing-resistant’, while tightening yield spreads in areas that are traditionally more associated with risk.
