The level of volatility in equities “should be higher” given the current geopolitical tensions and national debt levels, O’Connor said, adding the movement of markets has become disconnected from what is happening in the real world.
He goes so far as to draw parallels between the current mood in investment and the mood that gripped the industry in 2007, just one year before the financial crisis.
O’Connor, deputy manager of the Defensive Capital Fund, said he had positioned more defensively than usual, expecting a spike in volatility and a market correction in the near future.
“There’s been a big disconnect between what is happening in the real world, there is a lot of real world news going on but if you look at equity valuations it’s very, very subdued,” he said.
“I’m scratching my head as to why realised volatility is so low.”
O’Connor pointed to the FTSE 100 and S&P 500 30-day realised volatility at near 30-year lows of 6% last week, and the FTSE 250 volatility at a 12-year low in January as the basis of his concerns.
With global growth on the up, the US Federal Reserve hiking interest rates and markets reacting optimistically to the promises of President Donald Trump, O’Connor notes there is a basis for the current good mood.
