Fugnoli’s outlook

22 October 2015

In recent years, markets have been predictable, and the dominant influence of central banks has set the course of equity, bond and currency markets, while reducing volatility. But things changed in August….

We discussed these trends with Alessandro Fugnoli, Kairos Strategist.


Since August, the market seems to be veering towards uncertainty and greater volatility… What brought this on?

The past six years were unparalleled in terms of performance, both for bonds and equities, but it’s over now. This does not mean that recession is around the corner. On the contrary, returns on investments will still be possible, and although they will not come easily, they will be more than acceptable.

Growth over the past six years was, in any case, slow, except for China and other emerging countries. Developed countries have shown little growth, which is fundamentally due to four factors:

·         demographic growth became negative – in terms of aging and the declining population in certain countries, with an impact on national budgets;

·         productivity, after surging in 2009, has flat-lined;

·         the super credit cycle has come to an end, as total debt compared to GDP is at dangerous levels and authorities prefer not to implement tax policies;

·         the super cycle of raw materials is ending – think only of the excessive use of resources needed to sustain China’s urbanization process, which was supposed to have gone on forever and instead stabilized.

In any event, this modest growth has generated broad returns on investments because central banks have correctly gauged ultra-expansive policies, without the fear of inflation resuming. Given the abundance of unused resources in the system, inflation will remain in this balance for some time.


The Fed seems to have postponed the interest rate hike again… is that truly the case?

Actually, something has changed. In recent years, central banks have encouraged markets to rise, because they needed the “wealth effect” that leads to consumer spending. However, this mechanism cannot last forever and it is advisable to take steps to prevent bubbles and a consequent market crash.

Market growth is healthy if it reflects actual growth in profits and the real economy, not if it is due to a mere increase in risk propensity. Moreover, unused resources in the system are beginning to thin out: it suffices to look at the full employment in Germany, Japan and the United States. Considering this, some inflation could occur. For example, all we would need is the price of oil to come to a standstill.

For now, the Fed has one hand on the brakes, ready to pull back slightly. This does not mean that there is risk of recession, but we will certainly need to face the risk of fear, the offspring of the true big recession of 2008/2009.


Investment alternatives are currently limited: the search for returns necessarily entails risk. What are your predictions for the next six months?

I do not see risks of a bear market for bonds or equities, since Europe and Japan are pursuing ultra-expansive policies and the US will raise rates only if inflation resumes, which is still far off in the distance.

However, we are in a stage in which there are no linear processes and the asset manager’s job has become particularly challenging.

Right now, investments in dollars are preferable, as Europe, although it is undergoing a positive growth stage, presents more fragile structural conditions than the US. Take, for instance, what happened in Greece and Spain and the current migrant crisis, which has destabilized German politics.

In 2016, equities should resume showing better returns than bonds, which have come to the end of the line with respect to the past few years.

The scenario is not worrisome: by working with precision we can still achieve sound results.