Markets, News, Views, Commentaries…..
Let’s not assume volatility is behind us……..While equity markets have clawed back losses sustained in the latter months of 2018, settling nerves somewhat in the process, we shouldn’t expect that the recent rally can be sustained at this rate.
The Australian ASX200 index has bounced 12.7% since Christmas, and the US S&P500 by 19.2% buoyed by the Federal Reserve’s pivot to a more subtle stance on monetary policy after announcing that it will keep rates on hold until further notice. This was coupled with strong earnings results from some of the major global (US based) players such as General Electric and Facebook.
A quick look at our old friend the Volatility Index (or VIX) chart* shows that while uncertainty spiked in December, it has eased following the Fed’s revised expectations with the VIX dropping to a four-month low. But does this mean we should expect it to continue this way?………
Source: CBOE, Bloomberg
*for newer readers, the VIX Volatility Index provides a measure of market risk and investor sentiment/fear based on market expectations of future volatility.
……….. well, the consensus is strongly of the view that volatility will remain at a heightened level over the course of 2019.
Even though it is favourable for share markets that we’ll now see a pause in rate rises in the US (and indeed our own RBA confirmed in its February statement that a rate hike here was no longer certain by any means) there are still headwinds on the horizon: the winding back of central bank liquidity support via quantitative easing; tighter access to credit and the possible flow on effects of a slow-down in the Australian housing market; and of course the ever-present and slow-moving-circuses that are the Brexit negotiations and the ongoing trade discussions between the US and China.
On the US/China issues I noted a comment at the Davos World Economic Forum from Chinese Vice President Mr Wang Qishan that the US and Chinese economies were “mutually indispensible” and “neither side can do without the other………confrontation harms the interests of both sides”.
Either way, now is a good time to remind ourselves that volatility = opportunity for long term investors. Investment managers generally are reporting opportunities at the individual company level as well as pockets of value appearing in sectors (emerging markets for example) which have sold off heavily not just in the December quarter but the past year or two.
The important fundamentals never change….. make sure your exposure to shares remains prudent and appropriate and high quality; make sure you’ve got adequate cash reserves if you’re in or close to retirement/pension stage; and make sure you have some flexibility built into your plans. This is what we’re here to help with.
Sources: RBA, MorningStar Research, Lonsec, Platinum Investments, PM Capital.