March has been defined by the explosive conflict in Iran, which has sent investors reeling. This has led to a spike in volatility, with the VIX (a measure of US stockmarket volatility) surging more than 70% so far this year at the time of writing.
But for Will McIntosh-Whyte, multi-asset manager at Rathbones Asset Management, this does not seem to have made much of an impact on equity markets at the headline level.
According to data from FE fundinfo, most major equity markets are up in sterling terms or mostly flat so far this year. “The US index was at about 6,900 when this all kicked off, it’s not really a material correction yet.”
“Markets have gotten very good at looking through the geopolitical noise, particularly coming from the US,” McIntosh-Whyte said.
See also: Iran war escalation prompts investor ‘panic’ as oil surges past $100 and FTSE plunges
“This could be different, but the markets are very much expecting this to blow over,” leading to a lack of headline volatility.
This lack of volatility at the headline level is far from a new development, according to McIntosh-Whyte.
Indeed, for the past three years, strong performance from the top companies in global indices (the magnificent seven) had effectively “masked volatility in the equity market”, allowing the indexes to march upwards in “essentially a straight line.”
For example, despite the VIX rising more than 25% over the past year (as of 16 March) the S&P 500 has still managed to deliver a 58% return, and the MSCI World is up 57.1%, according to data from FE fundinfo.
Both markets successfully shook off tariff volatility around ‘liberation day’ last year, recovering from the initial decline of over 20 basis points each to end the year up.
See also: Markets rise on Trump’s EU tariffs U-turn
“The market simply doesn’t react to big geopolitical news in the same way it used to,” McIntosh-Whyte said.
The case for further volatility?
However, he added this lack of headline volatility could be challenged, as equity markets have become increasingly volatile beneath the bonnet.
“It would not surprise me to see this volatility continue to pick up over the next few years,” he said
Part of this is because the magnificent seven and other leading companies in indices are no longer as bulletproof as they used to be, he noted. For example, he noted after years of tech hyperscalers rising in a correlated pattern, they have underperformed this year for investors.
“These big technology stocks have generally been headwinds to market returns this year, which is very different to what we’ve seen in previous years.”
Meanwhile, stocks are posting much bigger moves owing to earnings, news flow or even speculation, which could increase further from here, he said.
For example, he pointed to RELX, which produced “reasonable numbers, good earnings growth,” along with proprietary data sets and leveraging their new technologies that other companies cannot easily do, according to McIntosh-Whyte.
“But now the market just doesn’t care,” he said. “It’s guilty until proven innocent.” RELX is down roughly 15% year-to-date, according to data from Google Finance.
Something similar happened with L&G’s full-year results, which fell mostly in line with expectations, but the company’s stock price still fell by 5.3% in early trading.
See also: L&G reins in asset management outflows to £27.7bn but shares still slide
While the Iran war has had a relatively muted effect on the headline equity markets, it’s having a much greater effect beneath the bonnet, according to McIntosh-Whyte.
People have sought safety in names that have been selling off this year, leading to a rotation in markets that has been obscured at the headline level, he noted.
For instance, the previously mentioned RELX rose by 17% in the past month, regaining some of the ground it lost earlier this year.
This has been an almost “total reversal” from how the stockmarket has performed so far this year, when investors were flooding into cyclicals, industrials and financials and selling software and tech.
While this is a challenge, it allows managers to be “active on an almost day-to-day basis” to take advantage of it, he said.
One way he has attempted to benefit from this is by owning an “index dispersion structured product”.
Essentially, it pays the team a return when the headline index itself is flat, but the underlying index is volatile, such as when tech sold off, but cyclicals rose earlier this year.
“No one really likes volatility like this, but it brings with it some opportunities,” he concluded.
