Is Rising Volatility the Start of the Great Correction?

T Rowe Price's Chris Alderson explains why stock market performance is diverging - and what investors should expect next

Emma Wall 14 September, 2018 | 12:39AM




Emma Wall: Hello and welcome to the Morningstar Series "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Chris Alderson, Head of International Equities for T. Rowe Price.

Hi, Chris.

Chris Alderson: Emma hi.

Wall: So, first things first, congratulations on winning the Morningstar Analyst Award for Outstanding House. I thought today we could talk about the broad global outlook. Because you have international equities and you are international asset manager.

Alderson: We are.

Wall: Over the last year markets have seemed diverged in their performance, the 12 months prior to that everything moved up together what have been the drivers of that diversions.

Alderson: Well, firstly we are absolutely delighted with the award so thank you and it's fantastic for T. Rowe Price. Why have markets diverged, why were they working in tandem before. I'd say we had very low rates, we had quantitative easing around the world. The central banks are taking away the punch bowl. The dollars gone stronger. We got some economic divergence.

The U.S. is doing very well. Strong dollar's obviously put pressure on different parts of emerging markets. We've seen the crisis in Turkey, Argentina that sort of thing. And Mr. Trump never allows us to have a quite day, does he? So, you know all the protectionist rhetoric is obviously in very full flow.

Wall: And where do we go from here. Obviously, volatility has picked up, although some are saying it's just returning to sort of more normal levels should we expect to see markets broadly moving up, but more volatile or do you think this is the beginning of the great correction.

Alderson: Well I hope it’s not the latter. I think it’s probably not the latter yet. I think there has been more volatility and I think more volatility is good. We welcome more volatility. For the last several years the whole active management industry has been under pressure. Everyone wants to get passive because everything moves together. I think it's good that we got some dispersion. And I think we talked about emerging markets earlier. I think it's logical what's done well and what's done less well.

Things like Turkey we've been sort of predicting this slow-motion train wreck for about six months now. And it's surprising that it took quite so long to come through. Will it lead to a real rollover here, I doubt it, inflation is still low, rates are still low in an absolute sense. Economic growth is still pretty good. And I think quite a lot of the rhetoric is around the mid-term elections. I mean Trump clearly wants to get reelected.

The House is somewhat open for debate. The Senate looks more likely. And I think the rhetoric carries on until before that and then possibly boom we get some fantastic deal him and Xi Jinping shake hands, haven’t I done a great thing for the world, markets carry on.

Wall: And one thing I think that’s quite interesting about this year is how much politics and geopolitics have influenced markets. Quite often you hear people say well economics and politics is not markets and that’s perhaps true somewhere like the UK. But increasingly over the last year what's happened geopolitically has impacted stock markets hasn’t it?

Alderson: It certainly has. I liked your earlier comment because that was sort of a refrain I was coming out within the past that actually all this geopolitics really didn't matter because it was all about money and effectively free money. It was all about free money, good economies and good earnings growth.

And now money is less free, it’s still cheap, but less free I think that’s leading to a lot more volatility. But also the noise we're getting out of the White House is probably more extreme than we've had in the last five years or so. So, I think it's perfectly understandable that it's created volatility.

Wall: Chris, thank you very much.

Alderson: You are very welcome. Thank you Emma.

Wall: This is Emma Wall from Morningstar. Thank you for watching.

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About Author

Emma Wall  is former Senior International Editor for Morningstar

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