Dispelling the myth: Volatility can be positive for returns

In 2017, the global economy transitioned from a period of sluggish, US-dominated growth, to a more synchronised global recovery. With inflation still well behaved, corporate earnings grew strongly, buoying both equity and credit markets and suppressing volatility, which reached historically low levels.  So far, 2018 has proved more challenging for some investors. Volatility spiked in the first quarter, driven by the unwinding of US volatility products and then compounded by an increase in global trade tensions and profit taking in US technology stocks. Unanticipated volatility spikes generally hurt in the near term, but they can also offer opportunities. Although generally short lived, the fear of loss among investors drives risk appetite downwards, and derivatives markets become dominated by those looking to hedge against downside risk. As a result, risk premia in option pricing can become elevated and this can create greater opportunity for alternative, option-based strategies to deliver positive returns.

Steve Waddington – portfolio manager. Insight Investment, a BNY Mellon company

 

In 2017, the global economy transitioned from a period of sluggish, US-dominated growth, to a more synchronised global recovery. With inflation still well behaved, corporate earnings grew strongly, buoying both equity and credit markets and suppressing volatility, which reached historically low levels.  So far, 2018 has proved more challenging for some investors. Volatility spiked in the first quarter, driven by … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Markets remain blinded by the light

Vix Index

While global headlines focus on continuing unrest in Iraq and worrying geopolitical developments in Syria and Ukraine, the mood among investors in global capital markets remains remarkably benign. Global market volatility remains unusually low by historic standards. In June, investors saw global stock markets reach record highs while the US Vix index – viewed by many as the key benchmark for expected US stock volatility – hit a new seven year low.

While these becalmed market conditions have offered welcome relief for some institutions – with government borrowing rates at or near historic lows – they are not good news for everybody. Low volatility can affect trading revenues, narrowing opportunities for investment banks to profit on trades. Nevertheless, the current environment appears to present a remarkably stable backdrop for wider economic recovery. A range of factors may influence volatility but in our view one central answer lies in the extraordinary financial policy stimulus adopted by various central banks – including the US Federal Reserve (Fed) – since the financial crisis. The unconventional monetary policies implemented in order to bring down interest rates faced by companies and households and spur growth have, in fact, boosted risk taking and total debt in the global economy.

Aron Pataki, Newton Real Return team

Source: Bloomberg

While global headlines focus on continuing unrest in Iraq and worrying geopolitical developments in Syria and Ukraine, the mood among investors in global capital markets remains remarkably benign.  Global market volatility remains unusually low by historic standards. In June, investors saw global stock markets reach record highs while the US Vix index – viewed by many as the key benchmark … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
QE – It’s a kind of magic

Markets are no longer following fundamentals

The post-crisis environment seems to be showing positive signs that QE has worked and we can look forward to strong, rising asset prices with minimal volatility. However, beneath the surface of this are the underlying problems existing that suggest investors should be expecting to see low returns and higher volatility for the foreseeable future. Primary indicators such as unemployment figures are generating ‘false’ signals, giving investors the wrong impression regarding the health of particular economies and consequently there is a misallocation of capital.

 

Nick Clay, Portfolio Manager, Newton.

The post-crisis environment seems to be showing positive signs that QE has worked and we can look forward to strong, rising asset prices with minimal volatility. However, beneath the surface of this are the underlying problems existing that suggest investors should be expecting to see low returns and higher volatility for the foreseeable future. Primary indicators such as unemployment figures … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Low volatility breeds currency contempt

Volatility levels in major asset classes

Low volatility in the foreign exchange market has created a very challenging environment for anyone trying to generate returns. Consensus trades have been shaken out and many managers are now reluctant to take aggressive positions. We remain convinced that diverging central bank policy will eventually be reflected in exchange rates so maintain our short euro, long US dollar (USD) and short Japanese yen (JPY) positions. USDJPY has been highly correlated with US Treasury yields and the rally in bond prices is beginning to unwind with more positive data. The one area of FX where there is some momentum is emerging markets and we have been selectively buying high carry currencies such as the Brazilian real, but balancing it with short positions in other beta currencies such as the South African rand.

Paul Lambert, Head of Currency, Fixed Income, Insight

Low volatility in the foreign exchange market has created a very challenging environment for anyone trying to generate returns. Consensus trades have been shaken out and many managers are now reluctant to take aggressive positions. We remain convinced that diverging central bank policy will eventually be reflected in exchange rates so maintain our short euro, long US dollar (USD) and … read more

  • Download
  • Print
0 comments | Join the conversation, comment now