Ways businesses can navigate volatility

One of the most commonly used words in company results announcements over the last earnings period has been “volatility”.

There can be little doubt about the tense period in which we are living – a land war in Europe and all the shock waves that come with that, rising inflation, increasing interest rates, global supply chain issues and the Covid pandemic.

Any one of these could create additional variability in the market. Combined, they make planning and investing especially tricky for businesses.

There is some concern that “recency bias” – where something that happened more recently has the appearance of being worse than something that occurred in the past – is simply making us think today’s scenario is worse than before.

However, looking at the data suggests that at least some of the levels of volatility have been higher than we’ve yet experienced in underlying asset classes. One reason for this relates to the forward-looking nature of markets – they price in the expectations of what the future is going to look like.

Sometimes, however, expectations are tuned on their head by events, especially shocks of the magnitude of Russia’s invasion of Ukraine or a once-in-a-century pandemic.

These events remind us just how difficult it is to predict the future and it is, therefore, not surprising we are experiencing heightened levels of volatility.

However, volatility is something that’s been around forever – it’s just that the current situation makes everything seems that much more pronounced.

Navigating this situation can be difficult. An important consideration for not only surviving but also perhaps even thriving in such a market lies in having a clearer understanding of the business risks over a medium to long-term period.

This means understanding how shocks to underlying market variables will affect your business. It also entails undertaking robust forecasting of the cash flows under multiple market scenarios. This helps inform businesses of the market risks embedded in their business.

Mansingh is head of business transactional banking at Investec