Well, here’s a contrarian long-term perspective on Thursday, notwithstanding the collapse on European bourses, and the NYSE’s invocation of Rule 48 amid the signs of contagion.
Volatility in European equities has indeed just passed a historic marker, as Philip Isherwood of Evolution Securities explains:
The result of all the macro-politics (or is that Merkel-politics) is that volatility has picked up and is, once again, more than +1 standard deviation above average. I have set out below a chart showing actual, annualised vol. for European equities over the past 30-years, with average and +1/-1 standard deviation bands highlighted. Currently, at 24%, vol has moved from above average to more than +1sd above average. [Click to enlarge the chart:]
And Isherwood points out the effect on returns:
…when vol. has been more than +1sd above average – the situation we are now in – average returns have, on average, been positive (+16bps). But, be careful, this is heavily biased by trading the high volatility back in. So, if vol. carries on biasing higher, returns will be weak, if not negative.
Quite.
Intriguingly, however, Isherwood argues these bouts of volatility might not last long:
…vol. is also highly mean-reverting and has spent 80% of observations over the past 30-years within a +1/-1 standard deviation range, and has been more than +1sd above average for just 12% of the time since May 1980.
And, looking to the macro:
The contagion of sovereign risk and political risk from bond markets into currency markets is understandable, but the corporate bond markets and equity markets ultimately feed off macro-economics and the corporate sector. Here the newsflow is good, and the ability to escape weakened geographies is also available. Uncertainty today should in H2 be replaced by a growing belief in the Global cycle and the corporate sector.
Contrarian, indeed. For it really wasn’t easy to believe on a day like Thursday:
But, well, that’s perspective for you.
Related link:
‘Greece simply doesn’t register,’ or, the world according to Goldman – FT Alphaville