Blog: Volatility? What volatility?

Robin McAdam, senior investment director at Edinburgh-based investment management firm Brooks Macdonald, makes the case for appreciating calmness in turbulent times

At the start of 2017, one could be forgiven for expecting higher stock market volatility than we have seen.

Following the outcome of the UK’s referendum on its European Union membership, the US presidential election and with numerous European elections on the horizon during 2017, many investment managers were bracing themselves for a difficult market backdrop. However, with the latest European election in France having recently ended with a market-friendly outcome, we are now witnessing some of the lowest market volatility in over two decades.

We would certainly agree that periods of uncertainty ahead of key events such as the Brexit vote, or US Presidential Election, can result in a pick-up in implied volatility. However, in recent years when volatility has spiked higher (particularly since the global financial crisis), central banks have been quick to step in to try and limit market turbulence. This intervention could be said to have conditioned traders and retail investors to “buy on the dip”, which further acts to dampen volatility. It could also be argued that current low levels of volatility reflect a healthy mix of both bears and bulls; in other words it’s easy for buyers to find sellers and for sellers to find buyers, which results in relatively stable pricing in certain assets.

So should we be worried?

Seasoned investment managers will have witnessed many periods of unusually low volatility in the past and will know that such situations can change rapidly. It is necessary to be mindful of the many economic risks that remain and the uncertain times that still lie ahead. One could perhaps be forgiven for allowing themselves to be swept along with the euphoria of global stock markets hitting record highs (in the US, UK and Europe). However, investment managers should be seeking to limit any damage that might occur if volatility increases quickly, by diversifying portfolios into numerous asset classes.

As renowned investor Warren Buffet recently said: “People talk about this being an uncertain time. You know, all time is uncertain. I mean, it was uncertain back in 2007, we just didn’t know it was uncertain. It was uncertain on September 10th, 2001. It was uncertain on October 18th, 1987, you just didn’t know it.”