Over the next six months, market volatility will likely taper off as investors, coming to terms with a recessionary Europe and a tepid U.S. economy, hunt for value across various asset classes.
Stefan Keitel, Global Chief Investment Officer for Asset Management and Private Banking at Credit Suisse, expects markets to stay volatile, but gradually stabilize later this year. "Sluggish global growth and eurozone concerns will continue to weigh on investor sentiment," he says. "But these worries have, to a visible extent, already been priced into the markets."
According to Keitel, whose views are contained in the Asset Management division's third-quarter edition of its Alternatives Quarterly, the outcome of the June European Union (EU) summit and ECB President Mario Draghi's recent statements about the European economy are positive steps that confirm the willingness for necessary policy action in the region.
However, while there is cautious optimism about the future, investors are still seeking returns now. Given the ongoing uncertainty, many relative value managers are taking a defensive position. Hedge fund managers in the long/short equity space, on the other hand, are looking to capitalize on higher dispersion among stocks, taking advantage of a greater opportunity to add value as the return differential between high- and low-performing stocks becomes larger.
Meanwhile, on the bond side, the Alternatives Quarterly noted that many hedge funds are increasing their exposure to high-yield bonds. Slow economic growth has interest rates stuck at all-time lows, and some fund managers see opportunities in high-risk debt securities. With most central banks committed to keeping rates low for the foreseeable future, high-yield bonds will continue to be the most attractive part of the bond market for the rest of the year, says Keitel.
While many economists predict global GDP growth will pick up in the second half of 2012, there is some concern that the world economy may be losing steam. How the economy performs will be the key driver of commodities prices, and thereby the profits that investors are able to realize on their commodity investments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.