World financial markets are now in "uncharted waters" not seen since the 1930s, warns fund manager and Future Fund guardian Carol Austin.
"We are dealing with a situation that none of us have dealt with in our business lives or our lifetime," Austin told The Weekend Australian in an interview this week.
Investment services director for the ASX-listed Contango Asset Management, Austin is also a guardian of the Future Fund and a director of HSBC Australia.
"The markets are so volatile it is very difficult to find reference points that you can say with confidence that you understand how markets behave in that environment," she says.
She says investors are concerned that governments and central banks around the world have already used much of their stimulatory firepower to boost economies in the wake of the global financial crisis.
Governments have blown out their deficits and central banks have used stimulative monetary policy such as quantitative easing with some moving to negative interest rates to boost their economies. This limits their potential to react in the event of a further economic slowdown.
"Markets are concerned at what would happen if things start to weaken," she says. "Where is the circuit breaker going to come from? That's why they are so nervous. We haven't seen such a period of low interest rates since World War 2. What we are seeing is back to the 30s. We are in uncharted waters because of the unconventional monetary policy which has been used. It is not surprising that there is a lot of volatility around."
Austin says the situation is different from previous periods where slowdowns were preceded by long periods of bull markets and corporate excesses.
"In the past there were always those excesses at the peak of a boom. But when we look at the environment we are facing at the moment, it is quite different from the run-up to the major corrections we have seen post World War 2. Financial markets don't have the same feel as they had with the bubbles associated with earlier market corrections. It doesn't mean that equity markets are not going to fall, but we are getting a divergence of opinion and we are getting seesawing of sentiment."
Austin says some market watchers are arguing that there are buying opportunities in markets on the basis they will bounce back. But there is also concern.
"If the momentum takes hold and we get into a downward spiral, things become scary, markets become bearish and it becomes self-fulfilling and becomes an economic correction as the authorities don't have any more ammunition."
Austin says there is excess capacity in many sectors because of "misplaced confidence" in the strength of the Chinese economy.
"The world is adjusting to the environment created by policymakers addressing the global financial crisis and the fact that China is not growing at the pace that was expected.
Austin says Contango, which manages $800m in assets, has adopted a conservative approach to its investment portfolio. But this is not an environment where people should
"cash out and put their money under the bed. There are greater risks today than there were a year ago and you adopt a more prudent strategy. But it would be very bad for many retail investors if they sold at the bottom."
She says the best case scenario for the world economy is a
"slow, grinding recovery, with global growth modestly edging forward and a modest improvement in equity markets which reflect a modest edging forward of earnings".