EquitiesMay 15 2017

Investors refuse to rule out era of record-low volatility

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Investors refuse to rule out era of record-low volatility
Vix tumbles as S&P 500 trundles along

Investors positioning for a spike in volatility from recent lows have moved too early, commentators have suggested, as market dynamics look likely to thwart any reversal of recent trends.

This year has seen mainstream equity markets, particularly in the US, drift steadily upwards with little volatility, despite a number of geopolitical concerns.

The trend was underlined last week when the Vix index, which gives an indication of volatility in the S&P 500, tumbled to its lowest level since the early 1990s.

Although investors are typically quick to predict a mean reversion when market indicators reach extreme levels, observers have tipped the current trend to continue indefinitely, citing a lack of obvious catalysts for change and post-crash investor caution.

“Stability breeds confidence and overconfidence and mass instability. If you flip that around, instability leads to little confidence and no confidence and mass stability,” said Henry Dixon, who runs the £187m Man GLG UK Income fund.

“People are determined to find that next crisis. That might be preventing it before it happens. You can see [low levels of volatility] persisting.”

Others believe the period of market calm could be encouraging recklessness among some asset allocators, with higher-octane approaches being hidden by serene equity movements.

Andrew Kinsey-Quick, a consultant at the Natixis portfolio research and consulting group, which monitors activity in model portfolios, said: “People are taking a bit more risk, but it’s not coming through in the numbers because the volatility is low. That’s not registering on their risk dashboards.

“If you are risk level 2 out of 10, the portfolios being managed are probably more a risk level 4 because volatility is suppressed. If there’s a sudden spike in volatility, that’s going to catch people with bigger downside losses than they expected.”

But Adrian Lowcock, investment director at Architas, said that with recent hurdles such as the French elections out of the way, he could see no obvious reason for violent market movements to resume.

 “There are very few market participants who can see a reason to be fearful,” he said. 

“There’s no political issue in Europe and Brexit will be slowly negotiated – there’s no shock there. [Donald] Trump will have some small victories and some small compromises. Economic data is pretty strong. 

“The visibility of interest rates [rising] is as good as we have had for 10 years. Nothing points to a reason for volatility to rise.”

A number of other causes have also been cited as reasons for low volatility, including the continued effects of quantitative easing on developed markets and the suspicion that many hedge funds are betting on the trend to continue.

“Recently, the popular trade is to short volatility in ETFs, in the US in particular,” said Julian Chillingworth, chief investment officer at Rathbones.

But Mr Chillingworth also warned against a sense of complacency. “People are perhaps a little too relaxed about the possible threats to the market out there,” he said.