Applied philosophy - The déjà vu tantrum

Applied philosophy - The déjà vu tantrum

With another “taper tantrum” on investors’ minds, we feel like we have been here before. Back in 2013, Emerging Market assets underperformed once the Federal Reserve announced plans to start reducing the pace of its asset purchases. We believe that point is unlikely to occur before 2022 and prefer to watch commodity prices, the US dollar and valuations to determine our stance on EM.

The past year has been marked by a constant feeling of déjà vu and not just because every day has felt the same as the one before (that is more Groundhog Day). We have witnessed: a crisis that has triggered extraordinary monetary and fiscal stimulus; the global economy going into a tailspin; financial assets recovering long before there is light at the end of the tunnel; rising yields driven by inflation fears and positioning for higher interest rates. We feel like we have seen this movie before.

Risk assets have reacted to these concerns in a similar fashion to what we have experienced in the past three decades. Since the 1987 market crash – when the expression “Greenspan put” was coined –, market sentiment has become increasingly reliant on the implicit and explicit support provided by central banks, most prominently by the US Federal Reserve.

Markets have become increasingly reliant on central banks and parents will be familiar with the reaction to real or imagined threat to the supply of treats. This is the analogy that was used to describe the so-called “taper tantrum” of 2013.

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