July 2011

Market Volatility: Where Do We Go From Here?

By: James Parkyn

As we mark the third anniversary of the financial market crisis breaking point of September 2008, and although capital markets have recovered, it is important for us to stay tightly focused on the road ahead and be prepared for any renewed market volatility.

First, on behalf of my colleagues at PWL, we would like to express sincere appreciation to all of you, our clients, for your business. With the recent extraordinary market highs and lows, our active risk management strategies have helped many clients recover from the downturn.

Looking ahead though, clients are wondering if the recovery can be sustained or if a new round of trouble is ahead. The U.S. economy is slowly improving, countries such as Greece, Japan and others are facing financial turmoil, and most central banks have artificially stimulated economies with low interest rates and asset purchases, known as QE or “quantitative easing”. In fact, QE2, the second round of quantitative easing launched in 2010 by the U.S. Federal Reserve, has ended this June. At this point, it is impossible to predict how this will impact interest rates and capital markets.

Governments seem unlikely to let the markets determine interest rates anytime soon. In the face of their extremely large debt loads, they could opt to take new policy actions to keep interest rates at or below the level of inflation. This type of policy, known as “financial repression,” favours debtors (governments) at the expense of savers (you).

What does this mean for your portfolio? While we cannot predict the future, we can carefully monitor the strategies that have worked well for us. For example, bonds have provided relatively high returns with low risk for three decades, but financial repression has historically led to very low and even negative bond returns — net of inflation. Therefore, we will make sure our bond strategy is well-suited to the changing environment, taking into consideration duration and changing interest rates.

As you will also read in this edition of Perspective, we are acutely aware that many of our clients are concerned whether they will have enough capital to enjoy their retirement years. The volatility of equity markets presents us with risks and opportunities. We will use rebalancing strategies, currency hedging and broad diversification to protect equity investments from extreme risks and capture the highest possible returns.

James Parkyn

Portfolio Manager
PWL Capital Inc.