According to Riley, head of credit strategy at BlueBay, the global investment environment will continue to be characterised by periods of calm punctuated by violent sell-offs and subsequent re-bounds in risk assets for the foreseeable future.
The latest bout of volatility is reminiscent to the sell-offs and rebounds in September and October last year, noted Riley, and contrary to what many expected- it did not extend into a year-end Santa-rally.
Each sell-off was connected to fears over global growth and the ability of central banks to provide further monetary stimulus, and every re-bound was fuelled by central bank policy action.
But Riley also said that recent history suggests that returns over the next month are more likely to be down than up after such sharp rallies.
“Mean reversion is a feature of these repeating episodes of market volatility – the greater the sell-off, the sharper the re-bound. But after such sharp relief rallies, markets are more likely to fall than rise over the following month underscoring the dangers of chasing market swings,” said Riley.
He added: “Retaining a disciplined focus on fundamentals, avoiding consensual and crowded investments and not chasing the market extremes will prove the most effective way to generate return on as well the return of capital.”
