The return of volatility
Why you don’t need to panic
The latest sell-off marks the first substantial increase in volatility after a lengthy period of relatively quiet markets. While it may be disconcerting for many, it’s critical to understand the background and context – what’s driving global markets – and what this means for our (we’re invested alongside you) investments going forward.
The key advice: There is currently no need to panic. Somewhat counter-intuitively to many individual or retail investors, the markets have been selling off in reaction to the prospect of continuing economic growth in the U.S. and amid strong fundamentals. This growth brings with it the likelihood of rising inflation and therefore higher interest rates – considered by the markets as an impediment to growth and corporate earnings in many cases.
There are also technical reasons behind the latest pull-back. A negative feedback loop has forced some volatility-sensitive investment strategies to exit risk positions. It may blow over quickly (as it did in the summer of 2015) or over the next month, but we don’t expect this to be a problem over the balance of the year.
What happened?
- The S&P 500 and MSCI World indexes sold off 6.5% over the first three trading days of February.
- The VIX (CBOE Volatility Index) has soared over the past few days, settling at over 37 after a prolonged lull (for all of 2017, it averaged ~11).
Why?
From Signature’s perspective, this sell-off appears to have been caused by a chain of events that started with a positive U.S. jobs report on February 2 (specifically, the rise in average hourly earnings growth from 2.5% year-on-year in the December 2017 report to 2.9% in January 2018). This led to a sharp sell-off in bonds and equities based on inflation fears. The selling was exacerbated by the reduction of leverage that many market participants were using to get upside exposure. In our view, this sell-off is not driven by a change to company fundamentals.
How are we affected?
Signature’s mandates are defensively positioned versus equity market benchmarks. The funds may be well positioned to outperform equity markets on the way down but high beta (more volatile) names will be at risk (the high beta basket has been the most damaged during the recent downturn).
Outlook and positioning: key takeaways
- The latest sell-off represents a clear-out of much speculative money and has potentially positive ramifications for the market. In our view, the Federal Reserve will not have to intervene to prick this speculative activity and will be more inclined to stick to its plan for a gradual exit from the markets as they effectively correct themselves.
- Interest rates are normalizing. This will likely happen gradually. In the U.S., yield levels may test new highs throughout 2018. Equity markets will have to contend with this situation and may see a repeat of recent circumstances but with less amplitude.
- As central banks gradually exit the markets – effectively withdrawing protection – volatility is normalizing. This is positive for actively managed products.
- Overall, fundamentals remain solid. This extends to business confidence levels, corporates, the banking and credit systems. This may generate substantial mergers and acquisitions activity. Signature has a positive equity view and will remain overweight.
It’s worth noting that volatility itself isn’t necessarily a bad thing – this can also generate opportunities. Signature is overweight cash in our balanced strategies versus bonds, and is looking to deploy cash and increase equity exposure; however, this will be done selectively as the team finds opportunities.
We also expect bond-like equities to perform well if there is another bump as government bonds are not providing the same level of protection that they used to given the current rising rate environment and pick-up in inflation.
This article written by Eric Bushell, CFA
Chief Investment Officer of Signature Global Asset Management.
This commentary is published by CI Investments Inc. It is provided as a general source of information and should not be considered personal investment advice or an offer or solicitation to buy or sell securities. Every effort has been made to ensure that the material contained in this commentary is accurate at the time of publication. However, CI Investments Inc. cannot guarantee its accuracy or completeness and accepts no responsibility for any loss arising from any use of or reliance on the information contained herein. This report may contain forward-looking statements about the funds, their future performance, strategies or prospects, and possible future fund actions. These statements reflect the portfolio managers’ current beliefs and are based on information currently available to them. Forward-looking statements are not guarantees of future performance. We caution you not to place undue reliance on these statements as a number of factors could cause actual events or results to differ materially from those expressed in any forward-looking statement, including economic, political and market changes and other developments. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. ®CI Investments and the CI Investments design and logo are registered trademarks of CI Investments Inc. ™ Signature Global Asset Management and ™ Signature Funds are trademarks of CI Investments Inc. Published February 2018.
Why you don’t need to panic
The latest sell-off marks the first substantial increase in volatility after a lengthy period of relatively quiet markets. While it may be disconcerting for many, it’s critical to understand the background and context – what’s driving global markets – and what this means for our (we’re invested alongside you) investments going forward.
The key advice: There is currently no need to panic. Somewhat counter-intuitively to many individual or retail investors, the markets have been selling off in reaction to the prospect of continuing economic growth in the U.S. and amid strong fundamentals. This growth brings with it the likelihood of rising inflation and therefore higher interest rates – considered by the markets as an impediment to growth and corporate earnings in many cases.
There are also technical reasons behind the latest pull-back. A negative feedback loop has forced some volatility-sensitive investment strategies to exit risk positions. It may blow over quickly (as it did in the summer of 2015) or over the next month, but we don’t expect this to be a problem over the balance of the year.
What happened?
- The S&P 500 and MSCI World indexes sold off 6.5% over the first three trading days of February.
- The VIX (CBOE Volatility Index) has soared over the past few days, settling at over 37 after a prolonged lull (for all of 2017, it averaged ~11).
Why?
From Signature’s perspective, this sell-off appears to have been caused by a chain of events that started with a positive U.S. jobs report on February 2 (specifically, the rise in average hourly earnings growth from 2.5% year-on-year in the December 2017 report to 2.9% in January 2018). This led to a sharp sell-off in bonds and equities based on inflation fears. The selling was exacerbated by the reduction of leverage that many market participants were using to get upside exposure. In our view, this sell-off is not driven by a change to company fundamentals.
How are we affected?
Signature’s mandates are defensively positioned versus equity market benchmarks. The funds may be well positioned to outperform equity markets on the way down but high beta (more volatile) names will be at risk (the high beta basket has been the most damaged during the recent downturn).
Outlook and positioning: key takeaways
- The latest sell-off represents a clear-out of much speculative money and has potentially positive ramifications for the market. In our view, the Federal Reserve will not have to intervene to prick this speculative activity and will be more inclined to stick to its plan for a gradual exit from the markets as they effectively correct themselves.
- Interest rates are normalizing. This will likely happen gradually. In the U.S., yield levels may test new highs throughout 2018. Equity markets will have to contend with this situation and may see a repeat of recent circumstances but with less amplitude.
- As central banks gradually exit the markets – effectively withdrawing protection – volatility is normalizing. This is positive for actively managed products.
- Overall, fundamentals remain solid. This extends to business confidence levels, corporates, the banking and credit systems. This may generate substantial mergers and acquisitions activity. Signature has a positive equity view and will remain overweight.
It’s worth noting that volatility itself isn’t necessarily a bad thing – this can also generate opportunities. Signature is overweight cash in our balanced strategies versus bonds, and is looking to deploy cash and increase equity exposure; however, this will be done selectively as the team finds opportunities.
We also expect bond-like equities to perform well if there is another bump as government bonds are not providing the same level of protection that they used to given the current rising rate environment and pick-up in inflation.
This article written by Eric Bushell, CFA
Chief Investment Officer of Signature Global Asset Management.
This commentary is published by CI Investments Inc. It is provided as a general source of information and should not be considered personal investment advice or an offer or solicitation to buy or sell securities. Every effort has been made to ensure that the material contained in this commentary is accurate at the time of publication. However, CI Investments Inc. cannot guarantee its accuracy or completeness and accepts no responsibility for any loss arising from any use of or reliance on the information contained herein. This report may contain forward-looking statements about the funds, their future performance, strategies or prospects, and possible future fund actions. These statements reflect the portfolio managers’ current beliefs and are based on information currently available to them. Forward-looking statements are not guarantees of future performance. We caution you not to place undue reliance on these statements as a number of factors could cause actual events or results to differ materially from those expressed in any forward-looking statement, including economic, political and market changes and other developments. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. ®CI Investments and the CI Investments design and logo are registered trademarks of CI Investments Inc. ™ Signature Global Asset Management and ™ Signature Funds are trademarks of CI Investments Inc. Published February 2018.