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
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.