Volatility index offers share investors false sense of calm

By contrast, when the global financial crisis was swirling in 2008, the index got to 80 points. And in 2010 and 2011 when the Greek exit issue first hit the headlines, the index also rose to around 40 points.

The low point was in early 2007 when it fell to 9.9 points.

So at its current level, it is unusually low given all the negative news.

Double-digit growth defies two-pronged threat

It comes as Australian super funds have reported double-digit profit growth for the third consecutive year, defying the unusual two-pronged threat of a slowing global economy and the likelihood of higher interest rates in the United States.

So should investors be worried about all this complacency? Matthew Sherwood from Perpetual thinks so.

"Overall, there is a dangerous sense of complacency in markets, with investors seemingly happy to overlook risks in the wake of the policy changes in Europe. But in the end, Grexit risks are delayed not resolved," he says.

He expects Greece will exit the eurozone in the next one to three years but thinks a regional recession is a low likelihood thanks to action taken by the European Central Bank.

But he sees two other risks – China with its high debt and the US Federal Reserve raising rates after keeping them at close to zero for seven years.

Sherwood has looked back to 1958 and the 10 tightening cycles that have taken place since then.

It's not all bad news.

ASX beats Wall Street on 9 from 10 cycles

The local sharemarket has done better than Wall Street on nine of those tightening periods and by an average of 18 per cent in the two years after the rate hikes started.

It makes sense that the smaller the rate rise, the better the performance is for US shares on a comparative and outright basis.

So how high will rates in the US go?

Since 1957 the average rate hike over the cycle by the Fed on those 10 occasions has been 4.9 per cent.

But if rates went anywhere near that, the economy and Wall Street would not cope well at all.

Sherwood thinks the Federal funds rate will top out at 2 per cent sometime late in 2017, implying the hikes from near zero will be very slow.

Indeed, he thinks the move in the US dollar over the past 12 months has already been the same as three hikes of one-quarter of a percentage point each.

First hike the concern

Still, it's that first hike that can cause all the problems. In 1994 and 2004 the first rate rise led to a sell-off on Wall Street of about 8 per cent to 9 per cent, just shy of a technical correction.

It's one reason why the Fed is making it such a slow, drawn-out process.

The problem for investors is that although the US sharemarket and US economy (and our sharemarket) might cope reasonably well with rate hikes in the end, the global spillover is what could cause all the problems.

Emerging markets, with all their debt, might not handle the rate hikes so well, even if they top out at 2 per cent.

Since the GFC, leverage around the world has been rising, with the average global debt increasing by 40 per cent of GDP, according to Perpetual. The main borrowers have been in Asia and Europe.

Sherwood says the best way to survive the rate hikes in the US is to gain some exposure to Japan and, to a lesser extent, Europe – as long as all the Greece issues can be contained.

"Japan here is a standout – it has lower valuations, continued policy support, an improving corporate sector and 31 consecutive months of improved earnings," he adds.