Watch out for sirens in arresting markets

In the past 12 months, gains in Spanish and German equities have been more than 28%, and Irish shares have benefited from a brighter global economic environment.

Despite concerns about sabre-rattling in southeast Asia, the threat of terrorism and uncertainty in the new US administration, market volatility as measured by the Vix index — the so-called “index of fear” — has remained remarkably low.

In America, the market mood was positive following last year’s presidential election, with banks and the technology and construction sectors performing well in anticipation of new spending plans and reform of regulation. This became known as the Trump reflation trade.

At the same time, however, US government bonds were sold off because of fears the spending plans could generate inflation. As the year progressed, the new president encountered legislative roadblocks regarding healthcare and immigration in particular, and this weakened investor confidence.

More recently, the market has responded by rotating away from more cyclical shares to more defensive ones, particularly those with a track record of paying solid dividends.

With the exception of gold, which started the year well on the back of signs of emerging inflation, commodities have had a rough first six months.

Gold is seen as a safe haven during times of political uncertainty, whereas oil has struggled. While Opec agreed production controls at the end of last year, US shale gas production continues to boom and additional supplies have come on stream from Libya.

Oil can be a double-edged sword for investors. Low prices help keep inflation under control and put more money in consumers’ pockets but they can make oil production less profitable, driving participants from the industry.

Central bankers have featured regularly in the headlines recently. Mark Carney, governor of the Bank of England, talked about the balancing act of controlling inflation and the possibility of raising interest rates. Janet Yellen, head of the US Federal Reserve, raised interest rates again last month — a move expected by the markets. Yellen also said that while she would not rule out another financial crisis, she feels that the world has become a safer place.

The bond market typically takes comments such as these into account. Globally, bond markets have generated modest gains in 2017.

We will watch the forthcoming US earnings season carefully for clues about the health of the world’s largest economy, following the positive first quarter.

Parts of the markets are undoubtedly experiencing stretched valuations. However, if earnings continue to grow, fund managers can continue to identify value. There is no shortage of risks, of course.

Most investing is still for the long term. One individual discussed with me how he had decided to hold off on action earlier this year because he was worried about the Chinese economy. Later he became more worried about Brexit, the elections in Italy and Holland and, more recently, the UK general election.

It is easy to do nothing. In the meantime, the fund that the individual had been investigating has increased in value by 18%.

There are interesting ways in which investors can go on smoother journeys through more effective risk-management strategies. Having experienced a bull market of more than eight years, we cannot become complacent.

This is a time of the year when many customers take stock and review what they hold. Sergeant Phil’s warning still holds.

Bernard Walsh is head of pensions & investments at Bank of Ireland Life