In many walks of life, consensus is a desirable outcome. For markets, it can represent a dangerous case of complacency.
Three big trades are dominating financial markets, reflecting a near universal agreement about the outlook for the global economy over the coming year. Money has been flowing into emerging markets and Europe, while favouring US technology and high-growth quality companies alongside corporate bonds.
These preferences reflect the view of the current divergences in the economic cycle, with EM and Europe seen as still tracking an upswing, while the US - absent a big shot of fiscal stimulus - appear to have entered a typical late-cycle environment.
Accompanying investors' current conviction has been a crushing of short-term market volatility across equities, currencies and bonds. The message from implied measures of volatility such as the Vix on the S&P 500, for example, is relax - at least for the next month.
From the perspective of the Long View column, the choices facing investors are familiar ones. Keep chasing the winners, make contrary rotations within sectors and asset classes, or move further towards the sidelines, leaving dry powder for buying the dip in case a shock erupts this summer.
Sticking with the current winners boils down to the idea that there remains enough juice left to push valuations for eurozone equities, emerging markets and technology shares, principally Apple and its mammoth $800bn valuation, Google-owner Alphabet, Microsoft, Amazon and Facebook, ever upwards. In a world of low bond yields and very accommodative central banks, which show few signs of wanting to unduly rattle investors, sticking to the current script is an easy call. EM has also prospered from the dollar losing its zip this year, and even if the Federal Reserve does rise rates next month, that trend remains largely intact.
Paul Quinsee, global head of equities at JPMorgan Asset Management, says a long period of outperformance by US equities has been replaced by international shares enjoying a period of playing catch up.
“Stay invested in growth strategies and international stocks can provide better returns than the US, “ he says.
Others are less comfortable with the current consensus.
Chris Watling of Longview Economics believes that EM and Europe are ripe for disappointment as China's tightening in financial conditions signals a peak in global reflation. Another sign of tightening pressure is the steady rise in dollar Libor since last summer.
“Everyone is very excited about Europe and EM, as is typical when we get to the end of a trade,” says Mr Watling.
Indeed, it is not hard to detect some unease. No matter the well-received corporate earnings in the US and Europe and an easing of political tensions; the conviction behind the long-Europe and EM trades requires fresh catalysts.
The big hope for investors remains the prospect of fiscal stimulus in the US, while the eurozone awaits reforms in France. Unfortunately, markets may be waiting for much of the summer and beyond for progress on either front.
Given the already strong performance for international equities, US technology shares and EM this year, it won't be a surprise to see markets face a tougher time gathering additional momentum this summer.
In terms of potential pitfalls, dire consequences of a China funding squeeze remain in the realm of tail risks. As does the prospect of US wage growth suddenly accelerating, thereby squeezing corporate profit margins and prompting a more aggressive pace of tightening from the Fed.
The current low level of bond yields underpins valuations for fast-growing companies in the equity market. It also betrays a lack of confidence in prospects for the broader economy. With global central bank policy still playing a powerful role in capping yields, the fact remains that, almost a decade on from the financial crisis, economic growth is lower, and ever more debt has piled up.
As the 10th anniversary of the credit crunch approaches, Ian Spreadbury, portfolio manager at Fidelity, notes: “Nominal growth has continued to trend down to the lowest level since the 1930s - all despite trillions of QE and a continuation of super-low interest rates”. He makes an important point: “The structural factors which led to the credit crunch have intensified: in particular, high global debt to GDP, population ageing and wealth inequality.”
For markets, we have slumbering volatility, lofty asset valuations, excessive amounts of debt and a reach for yield that results in hefty orders for corporate bond sales, while that old favourite of EM carry trades is firmly in favour. There's certainly no shortage of complacency.
