Cohen: 3 Megatrends Which Will Drive Volatility

Investors should prepare for more volatility in their portfolios, and particularly in equities as we’ve already seen movements in bonds and FX, according to Stephen Cohen, managing director and chief investment strategist of BlackRock international fixed income and iShares EMEA.

Speaking at the Chartered Institute for Securities & Investment conference today, Cohen told the audience that there are several “megatrends” that will drive volatility in the near future.

1) Too Many Buybacks?

Cohen pointed to the record number of U.S. companies that have come to the European bond market in the last six months, and that when you add up the numbers of buybacks and dividends of the S&P 500 it counts for most of these companies’ earnings, suggesting shareholders are reaping rewards at the expense of these companies having cash on their balance sheet or investing it for the future.

“In the short term that’s great for equity investors, but there’s a question as to what that means in the long term,” said Cohen.

The PowerShares Global Buyback Achievers UCITS ETF (BUYB) has performed over 10 percent since launch in October 2014.

Not only are they rewarding shareholders, but companies have also been leveraging for the last few years – a stark turnaround from their cautious approach just after crisis of 2008.

“This is going to change how we think about credit investment,” he said.

2) Technology Is A Disruptive Force

Technology is a disruptive force as it forces prices down. Cohen referred to taxi app Uber, in a similar line to investor guru Mark Mobius, who argued that the internet is aggravating deflation across the world.

Cohen added that technology can help combat the growing problem of ageing populations. For example Japan, the leading user of robotics, could use these machines to fill in for the gap of young people.

“In our view technology is a use force for change, around volatility and particularly around inflation. And if it is deflationary, the long end of bond yields could stay a lot lower than people think, even in a rising rates environment,” he said.

The ROBO-STOX Global Robotics and Automation GO UCITS ETF (ROBO) has fallen over 1 percent in USD terms since 27 October 2014.

3) Assets Are Acting Strangely

Cohen said that the combination of quantitative easing and diverging monetary policy, regulation forcing investors to own different types of asset classes, and in turn what that does to secondary market trading, will have a huge impact.

Consequently diversification is tricky as bonds and equities are behaving differently in portfolios as opposed to history. One example is German bunds that have seen “huge intraday volatility” over the past three to four months.

“So over the next 12 to 14 months we have to think about what are the correlations we should be using, where are we getting diversification and how volatile are these asset classes?” he said. “What we thought was safe and risk free, maybe isn’t.”

Chuck in Greece, a referendum over Brexit, Spanish elections, China’s attempt to switch from an investment-led to a consumption-driven economy and the fall in oil price feeding through into the economy, and investors should be ready to see more volatility in FX, equity and bond markets.

He said this conundrum will have an impact on investors who are trying to put together a balanced portfolio.