If you’ve been keeping track of the financial pages and blogs in recent days you’ll be aware of commentators getting anxious about the Vix’s apparent serenity, having falling to its lowest level for five years. It’s a portent of chaos to come, they say, as they prepare to scarper out of risk assets before the fall of the first autumn leaves.
It stands to reason that volatility will spike back up in September as City workers return from their holidays, or at least by St Leger Day if you follow that old adage. But, with the eurozone woes having taken something of a backseat to the Olympics et al in recent weeks, is there a risk that investors have become too complacent?
To be honest, I wouldn’t have a clue as I’m not an economist. Still, I will say that given that the Vix is a measure of the implied volatility of the S&P 500, investors may one way or another want to reassess their holdings in US equities.
An expensive concern
Fund managers have become well versed in calling out US equities as expensive, so maybe a correction wouldn’t be such a bad thing. Still, many asset allocators remain overweight the country on the basis of its pro-active central bank and the apparent rude health of its largest companies. It helps that the S&P 500 has outperformed European equities (Euro Stoxx 50) by around 30% over the past year.
A recent Merrill Lynch fund manager survey recorded that a net 13% of respondents were overweight US equities, which Lars Kreckel, global equity strategist at Legal & General, points out is roughly one standard deviation above the normal reading.
“Using one of our preferred valuation measures, the cyclically adjusted PE (CAPE), US equities now trade on twice the CAPE of European equities, easily the highest ratio since our records begin in 1983,” he adds.
“When such a large number of indicators are close to extreme levels, it tells us that US equities are priced to deliver relative perfection and are very vulnerable to any relative disappointment.”
Contrarian/brave investors might prefer to put their money in European equities, or perhaps Japan, which one asset allocator recently described to me as “the best performing asset class for the next 10 years”.
Taking profits on US funds might not be such a bad idea given how far they have risen in the past 12 months (the average fund in the IMA North America sector is up 28%, according to FE Analytics).
Alternatively, for long-term investors, maybe volatility is nothing to fear after all. At the very least, let’s ignore the market chatter and wait until we have something tangible to worry about before we start truly panicking.