Plunge in volatil­ity stokes fears over crash

An­a­lysts warn that mar­kets face ‘rude awak­en­ing’ after the Fear In­dex tum­bles to record end-of-year low

The Sunday Telegraph - Money & Business - - Front page - By Tom Rees

VOLATIL­ITY has ended the year at record lows, adding to con­cerns that com­pla­cent in­vestors are sleep­walk­ing into the next crash as stock mar­kets around the world hit new highs.

The VIX In­dex, a widely-used mea­sure of ex­pec­ta­tions of fu­ture volatil­ity, slipped a fur­ther 21pc in 2017, fin­ish­ing at an end-of-year record low of 10.40. In the past, low volatil­ity has pre­dated some of the big­gest mar­ket col­lapses.

Ac­cord­ing to the VIX in­dex, also known as the Fear In­dex, volatil­ity tum­bled to an in­tra­day low of 8.56 in Novem­ber, its low­est level since the in­dex be­gan in 1990, while FTSE-100 volatil­ity is also at an end-of-year record low at 9.56.

The last time volatil­ity sunk to lev­els this low was in the run-up to the fi­nan­cial cri­sis a decade ago and volatil­ity then soared to a peak of 80.86 at the height of the global down­turn in 2008.

Mar­kets have taken warn­ings of a pos­si­ble nu­clear war over the Korean penin­sula, stut­ter­ing Brexit talks, and Don­ald Trump’s chaotic ad­min­is­tra­tion in their stride with the Dow Jones and FTSE 100 hit­ting mul­ti­ple record highs this year.

Global share prices have surged $9 tril­lion this year. The FTSE 100 surged by around £141bn dur­ing 2017, ac­cord­ing to the Lon­don stock ex- change, while the FTSE 250 in­dex of medium-sized com­pa­nies gained around £52bn. Asian mar­kets posted their best year since 2009, and Euro­pean mar­kets had their strong­est per­for­mance since 2013.

How­ever, mar­kets could be “rudely awak­ened” from their slum­ber by po­lit­i­cal or cen­tral bank­ing shocks in 2018, ac­cord­ing to Ac­cendo Mar­kets an­a­lyst Henry Croft.

The “ex­tra­or­di­nary mon­e­tary pol­icy mea­sures” im­ple­mented by cen­tral banks in the af­ter­math of the cri­sis and, most im­por­tantly, sev­eral rounds of quan­ti­ta­tive eas­ing have un­der­pinned the low volatil­ity and helped stocks climb to record highs, Mr Croft said.

The FBI in­ves­ti­ga­tion into al­leged Rus­sian col­lu­sion in the 2016 US elec­tion “re­mains a dark cloud hang­ing over the Trump ad­min­is­tra­tion” and ECB ta­per­ing of its huge quan­ti­ta­tive eas­ing pro­gramme too quickly, could jump­start mar­kets into life again, he said.

Quan­ti­ta­tive eas­ing has driven in­vestors out of safer bonds and into riskier stocks, keep­ing their prices in­flated. The ECB will be­gin to wind down its €60bn-a-month bond-buy­ing pro­gramme and the Fed­eral Re­serve started to trim its bal­ance sheet of gov­ern­ment bonds last Oc­to­ber.

With cen­tral banks shift­ing to­wards tight­en­ing pol­icy and the global econ­omy mov­ing from dis­in­fla­tion to in­fla­tion, it is “un­likely that UK eq­uity volatil­ity can re­main rooted so low in 2018”, ac­cord­ing to Jef­feries global eq­uity strate­gist Sean Darby.

The progress of Brexit talks re­mains a key cat­a­lyst ready to ig­nite mar­kets, an­a­lysts said.

Mr Croft­said: “Brexit re­mains the big un­cer­tainty for the UK econ­omy. Fears of re­ces­sion have so far proved un­founded, but un­til the fi­nal form of the UK’S di­vorce from the EU emerges no one can be sure of its im­pact on Bri­tain.”

A study of 40 fi­nan­cial bub­bles by the Swiss Fi­nance In­sti­tute ear­lier this year found that in 65pc of the cases when they popped volatil­ity was sub­dued. How­ever, its an­a­lysts con­cluded that volatil­ity is not a “re­li­able in­di­ca­tor” of a stock mar­ket crash.

This year has turned out rel­a­tively well con­sid­er­ing the doom-laden fore­casts that greeted Bri­tain’s shock vote to leave the Euro­pean Union. On the whole, the econ­omy has per­formed bet­ter than ex­pected. There has been no “im­me­di­ate and pro­found shock” as George Os­borne con­fi­dently pre­dicted. The re­ces­sion that was pre­dicted never came, hun­dreds of thou­sands of jobs have not been lost, and the big hit to house­hold in­come hasn’t oc­curred.

Yet Bri­tain’s calami­tous Brexit ne­go­ti­a­tions con­tinue to cast a shadow over pro­ceed­ings. Brexit un­cer­tainty tops vir­tu­ally ev­ery ma­jor poll of Bri­tish busi­ness lead­ers and is the chief rea­son in­vest­ment re­mains con­strained and pro­duc­tiv­ity painfully weak. Mean­while, a sharp fall in the sup­ply of EU work­ers is caus­ing se­ri­ous prob­lems for some com­pa­nies. No won­der then that the econ­omy is ex­pected to go into re­verse. Weak­en­ing growth at home threat­ens to rel­e­gate the UK to the bot­tom of the global eco­nomic league ta­bles just as ac­tiv­ity picks up around the world.

Over­all global GDP growth is pre­dicted to come in at a bullish 4pc with China and In­dia lead­ing the pack at 7pc growth each. Ire­land is fore­cast to notch up a highly im­pres­sive 3.5pc growth and the US is tipped to reg­is­ter 2.4pc.

The euro­zone has been pen­cilled in for 2pc over­all but the UK is ex­pected to man­age an em­bar­rass­ing 1.4pc in 2018, the low­est of all the G20 economies.

And if tum­bling out of the EU wasn’t enough to con­tend with, the year brings fresh dan­ger – the pos­si­bil­ity of a Labour gov­ern­ment led by ar­guably its most Left-wing leader ever.

It has sur­passed Brexit as the is­sue that trou­bles some busi­ness lead­ers most. Jeremy Cor­byn would take Bri­tain back to the Seven­ties by na­tion­al­is­ing in­dus­tries, forc­ing wage caps on busi­nesses and giv­ing huge power to the unions. So how do such un­cer­tain­ties bode for 2018? The ques­tion ev­ery­one is ask­ing is will the FTSE 100 end the year higher or lower than its 2017 close?

With the volatil­ity in­dex reg­is­ter­ing a record low, mar­ket ex­perts fear that in­vestors are be­ing com­pla­cent about global risk – in the past, low volatil­ity has pre­dated some of the big­gest mar­ket crashes.

The global back­drop was ar­guably more un­set­tling 12 months ago but mar­kets, par­tic­u­larly eq­ui­ties, have shrugged off wide­spread geopo­lit­i­cal un­cer­tainty in­clud­ing the threat of nu­clear war on the Korean penin­sula, Brexit and the chaos of Don­ald Trump’s ad­min­is­tra­tion, to fin­ish the year at all-time highs.

Pre­dic­tions are a fool’s game but I wouldn’t bet against mar­kets adopt­ing a sim­i­larly bullish stance next year.

‘I wouldn’t bet against mar­kets adopt­ing a bullish stance next year’

March of the dis­rupters

The buzz­word of 2017 is “dis­rup­tion” – and with good rea­son. Ev­ery­where you look, tra­di­tional in­dus­tries from car mak­ing and me­dia to phar­ma­ceu­ti­cals and re­tail are be­ing upended by the rapid ex­pan­sion of Sil­i­con Val­ley’s tech giants. For in­vest­ment bankers this is great news – the pace of change is forc­ing many of the big in­cum­bents to pur­sue block­buster deals that take them away from their tra­di­tional ar­eas of ex­per­tise and into new sec­tors.

This year was an­other bumper one for deal-mak­ing, with merg­ers and ac­qui­si­tions sur­pass­ing the $3 tril­lion (£2.2 tril­lion) mark for the fourth con­sec­u­tive year. Next year is tipped to be even busier. The march of the tech ti­tans shows no sign of slow­ing.

Booths goes back to ba­sics

Over-priced melon halves, de-icer for sale in the sum­mer and clumsy store ad­verts – it’s enough to make any re­spectable north­ern gro­cer throw his flat cap and stripy apron in the bin.

But when a cus­tomer of posh su­per­mar­ket chain Booths com­plained about some of its new poli­cies, boss Ed­win J Booth promised im­me­di­ate change.

Dig­i­tal change has in­flicted mas­sive pain on many tra­di­tional chains, leav­ing them fac­ing an un­cer­tain fu­ture, in­clud­ing Booths, which has strug­gled to make a profit in re­cent years.

It is one of the first rules of re­tail but by re­mem­ber­ing to put the cus­tomer first, the 170-year-old chain’s sur­vival prospects will be in­stantly boosted. Other lag­gards should fol­low suit be­fore call­ing in the usual army of ex­pen­sive ad­vis­ers to turn things around.

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