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BLOG: 2017 was a most unusual (but good) year for investing

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Written by: Shaun Port
30/01/2018
2017 was a year with unusually low volatility, which made it a great year to invest in equity markets. We look back at market volatility last year and what we can expect from the year ahead.

When it comes to investing, volatility – the daily changes in asset prices – is normal; it’s why it’s important to invest for the long-term, giving investments a chance to ride out any losses.

2017 was a year with many events that could have led to increased market volatility: ongoing Brexit uncertainty, various European elections and President Trump’s turbulence. But despite this, markets overall were rather resilient. By historical standards, volatility was extremely low.

There are different ways to measure market volatility. Some investors use the CBOE Volatility Index (VIX) to establish the stock market’s expectation of volatility. Another way to measure market volatility is to look at the number of days in which equity markets lost more than 1%. A 1% drop in a single day might not seem like a big movement, but it gives us an indication of the daily changes in asset prices.

The chart below shows the number of days each year, since 2011, that each of the world’s major stock markets lost more than 1%.

VolatilityNutmegBlog

The FTSE 100 only had nine days in which it fell by more than 1%: the lowest number since 1995, and significantly fewer days than the previous two years (33 days in 2016 and 37 in 2015). This low volatility was despite Theresa May triggering Article 50 and ongoing uncertainty around Brexit, a snap general election and the first Bank of England rate rise for more than a decade.

In the US, the S&P 500 posted only four days where the losses exceeded more than 1%, again the lowest since 1995 and only a fraction of the previous two years (22 in 2016 and 31 in 2015). Germany (DAX) and Japan (TOPIX) posted the highest number of days with over 1% losses in 2017 – at 17 and 15 respectively. In these markets, elections and political uncertainty contributed to increased market volatility.

It’s not just developed markets that showed decreased volatility last year. Emerging markets –countries such as China, South Africa and India – which are traditionally seen as more volatile, have also been very calm, posting only eight days of losses of more than 1%.  Emerging markets rallied in 2017, driven by solid economic fundamentals and recovering global trade. Production growth accelerated across a range of developing economies and global trade grew at 5% – the fastest pace since 2011.

A number of factors played a role in the worldwide low volatility of 2017, but it was largely driven by market strength and synchronised global growth.  Asset price volatility worldwide was dampened by continuing quantitative easing programmes as the policy encouraged excess liquidity in to equity markets. All of this negated investor expectations of a rebound in volatility.

So, what does it all mean?

While not completely unheard of, these years of unusually low market volatility are few and far between. For the UK and the US markets for example, we haven’t seen this low level of volatility for over two decades, since 1995. It made last year a great year to invest in equity markets, but such calm periods rarely last; an eventual rise in volatility is to be expected.

This year, developments in China, where the economy is moving away from being industry-led to a service economy and reforms of the financial sector could have wider-reaching implications on global markets; political risk hasn’t gone away, with Italian elections in March, mid-term elections in the US in November and further uncertainty around Brexit; and, off the back of a strong year of growth in markets, we’d expect to see inflation impacting markets.

A return of market volatility is why it’s important to invest for long-term goals and ensure portfolios are diversified across markets and assets to minimise the impact of losses when they happen.

Shaun Port is chief investment officer at Nutmeg

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