The recent Brexit vote in Britain to leave the EU (European Union), has increased stock market volatility and pushed global interest rates down further. In many countries including Canada, the 10 year government bond yields are the lowest on record.
These events are confirming a high level of global economic uncertainty which currently prevails. Will the EU survive as an entity long term if Britain is to leave? Will China be able to avoid a credit crisis and continue to grow its economy? How does the United States election playout this fall, especially if Donald Trump was to be elected President? These are a few of the present concerns investors are dealing with. They are being cautious forcing global government bonds down to record lows, but they need yield which helps limit stock market weakness. Investors are substituting dividend and capital gain returns for interest payments which are very low or nil on some government bonds.
Central Banks around the world are very accommodating concerning their current interest rate policy and providing financial stimulus. We are in uncharted territory concerning current Central Bank policies, so how this easy money policy plays out long term is difficult to predict with any accuracy. The short to mid-term time frame should see continued global stock market volatility with sideways to slowly rising rates of returns.
It is important to remember the old stock market adage “Market Climbs a Wall of Worry”. We have a lot to worry about, but globally we also have very accommodating government and Central Bank policies. As long as these policies prevail interest rates will stay at record lows and the stock market should have a rising bias.
In summary I will remain quite conservative in our investment style as we go through 2016 into 2017, trying to take advantage of buying opportunities when they arise.