Aurora Updates Volatility: Where are we now?

Transcription

1 Aurra Updates Vlatility: Where are we nw? 2 July 2015 Executive Summary With the clse f the financial year, markets are fcused n the glbal ramificatins f the Greek debt crisis/ptential exit f the Eur and the lcal ramificatins f a Chinese slw dwn. Markets are yet t react in any significant way Jhn Crr Chief Investment Officer jcrr@aurrafunds.cm.au In the mnth f June, equity markets were sft with the Australian market ff 5.5% and glbal equity markets nly ff 2.5%. Despite these recent falls, equity markets are still abve the clse f 2014: +0.9% fr Australia and +1.5% glbally. Thmas Gillespie Head f Research tgillespie@aurrafunds.cm.au Mirrring the very mdest equity market mves, vlatility is still firmly in the mid-range: Australian equity vlatility is currently 15.1% (realised) - nly marginally higher than the end f Over the last ten years, the Australian equity market has been mre vlatile than current levels apprximately 40% f the time. Internatinal markets have been mre vlatile 60-70% f the last ten years. As with all asset vlatilities, distributins are heavily skewed with vlatility capable f mving mre n the upside rather than dwnside. Summary: It is t premature t suggest current macr driven vlatility has run its curse. Disclaimer This infrmatin has been prepared by Aurra Funds Management Limited (ABN , AFSL ). It has been prepared withut taking int accunt the bjectives, financial situatin r needs f any investr, which shuld be cnsidered befre investing. The infrmatin in this dcument is f a summary nature nly and des nt cnstitute advice f any kind, nr is it an ffer f any financial prduct. Past perfrmance is nt a reliable indicatin f future perfrmance. The infrmatin and strategies cntained in this dcument are subject t change and whilst every care has been used in its preparatin we accept n respnsibility fr any errr and missin. Yu shuld nt rely n this infrmatin. Aurra Funds Management Limited, ABN , AFSL N

2 With the clse f the financial year, markets have becme fcused n the glbal ramificatins f the Greek debt crisis/ptential exit f the Eur and mre lcally the ramificatins f a Chinese slw dwn. While nrmally it is trite t be permanently pessimistic, the current situatin is significant in that the pssibility f asset price cntagin is relatively high: UBS frecasts a 40% chance f GREXIT and if this were t arise then a further 40% chance f severe cntagin.* Cnsequently, the Australian equity market (S&P/ASX 200) fell by 5.5% in the mnth f June cmpared t 2.5% fr glbal equity markets (MSCI) and 2.1% fr US equity markets (S&P 500). Hwever, these markets are all still marginally higher fr the calendar year 2015: Australia up 0.9%, glbal up 1.5%, and the US up 0.2%. See Figure 1 belw. Figure 1: Australian and Glbal Equity Market Mvements ver Australia (S&P/ASX 200, LHS) Glbal (MSCI Wrld, RHS) Despite these recent market falls, equity realised vlatility has barely risen Figure 2. Figure 2: Australian and Glbal Equity Vlatility ver % Australian equity vlatility (S&P/ASX 200) 15% Glbal equity vlatility (MSCI Wrld) 14% US equity vlatility (S&P 500) 13% 12% 11% 9% 8% Aurra Updates / Vlatility: Where are we nw? / 2 July

3 Jan-2000 Jan-2001 Jan-2002 Jan-2003 Jan-2004 Jan-2005 Jan-2006 Jan-2007 Jan-2008 Jan-2009 Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 In the lnger term cntext, the mdest rises in equity vlatility vlatilities has merely resulted in current levels remaining firmly in the mid-range see Figure 3 belw. Figure 3: Australian Equity Histric Vlatility Time Series and Distributin 70% 60% 50% 40% 30% 20% Daily Mnthly 0% Figure 3 als shws the imprtant characteristic f asset vlatilities: vlatility has the ptential t mve significantly mre n the upside than dwnside. Equivalently, it is usual fr vlatility t be in the lw/mderate zne fr the vast majrity f time, but can rise significantly ver a shrt perid f time. Hence, the current levels f apprximately 15% are arund the median f levels seen in the last 15 years, the highs in vlatility ver this perid have been extreme at ver 50% vlatility. The current mderate levels f Australian equity vlatility are reflected in ther equity markets and ther risk assets. See Figure 4 belw. Figure 4: Currency and Internatinal Equity Histric Vlatility Time Series 70% Australia (S&P/ASX 200) 60% 50% 40% US (S&P 500) US (VIX) Currency (AUD/USD) 30% 20% 0% Aurra Updates / Vlatility: Where are we nw? / 2 July

4 Investrs wh believe a vlatility spike may be a nn-negligible pssibility in the near future need t carefully examine their investments in the current envirnment. Mst, if nt all risk assets (equities etc) have a strng negative expsure t vlatility as vlatility rises, asset value typically declines sharply. Mrever, many alternative assets wuld appear t mnetise vlatility premia and s are als significantly shrt vlatility. The Aurra Frtitude Abslute Return Fund is very different in that ur cre strategy f maintaining a vlatility smile as a prtfli risk management tl generates a psitive expsure t vlatility thrugh the management f bught ptin psitins. See ur nte Aurra Updates: Defensive Strategies and Lw Vlatility, 13 August 2014 (available at fr mre analysis fr this phenmena. Summary: It is t premature t suggest the vlatility cycle driven by these significant drivers has played its curse and in ur pinin there is a nn-negligible risk f an asset vlatility spike and/r markets entering a regime f higher levels f vlatility seen fr the last cuple f years. While much has been written n the ptential utcmes fr the current situatin, mst signals pint t a sustained perid f higher vlatilities. It is t early in the cycle t shrt vlatility. * Yians Kntpuls et al, Greece and the Markets: The Only Thing t Fear is, UBS Research, 28 June Aurra Updates / Vlatility: Where are we nw? / 2 July

5 Nte The Aurra Frtitude Abslute Return Fund (ARSN , APIR Cde AFM0005AU) has been issued by Aurra Funds Management Limited. Disclaimer This infrmatin has been prepared by Aurra Funds Management Limited (ABN , AFSL ). It has been prepared withut taking int accunt the bjectives, financial situatin r needs f any investr, which shuld be cnsidered befre investing. The infrmatin in this dcument is f a summary nature nly and des nt cnstitute advice f any kind, nr is it an ffer f any financial prduct. Past perfrmance is nt a reliable indicatin f future perfrmance. The infrmatin and strategies cntained in this dcument are subject t change and whilst every care has been used in its preparatin we accept n respnsibility fr any errr and missin. Yu shuld nt rely n this infrmatin. Aurra Funds Management Limited ABN AFSL N Aurra Updates / Vlatility: Where are we nw? / 2 July