During the third quarter, geopolitical events, including Syria, the Federal Reserve’s decision not to taper, and U.S. political posturing over a government shutdown, brought turbulence and increased volatility to equity and fixed income markets. There was high volatility seen in fixed income markets and a shift in correlations between U.S. equity and fixed income that we captured. These shifts weren’t seen within traditional fixed measures.
Notably, towards the end of September, our assessment of the risk environment began to indicate an easing in the turbulence we experienced over the summer. Our risk measures suggest we may be moving towards a more favorable environment for risk taking.
As we assess the risk environment going into the fourth quarter, it is unlikely that a widespread market selloff will occur as a result of the geopolitical tensions that shaped the third quarter.
Our insights currently indicate that assets outside of the U.S. will outperform and our global macro view holds that investors who are willing to take on diversified risks will be rewarded. Under this scenario, Europe, Asia and emerging markets continue to offer the greatest relative value in this environment. Interestingly, our view on U.S. REITs— from a portfolio construction perspective—have somewhat diminished. Given that foreign property and real estate seem to be less correlated, we believe there is greater upside in constructing portfolios with non-U.S. real estate assets.
We expect continued volatility in the fixed income markets given speculation over potential Fed actions. However, overall, we believe markets will remain resilient and volatility will decrease throughout the fourth quarter.