High income returns likely to decline

The key themes in this quarter's strategy paper are the volatility of international equity markets and the inflation implications of a period of low interest rates.

Why has volatility increased in international equity markets?
The sideways price action of equity markets during the earlier part of this year ended abruptly in June as increased concerns over accounting scandals overshadowed other encouraging developments.

The sell-off itself prompted further selling from market participants who, just like in late 1999 and early 2000, made trading decisions on the basis of recent price momentum. Just as in a bull market, when there are buyers simply because prices have risen, in recent months there have been sellers simply because prices have fallen.

Eventually, such market pressure exhausts itself and securities end up in the hands on stronger holders who have entered the market and are enticed by attractive fundamental values. We believe that we are starting to see signs of this transition.