Fundamentals remain strong despite market volatility

Paul Chan, Head of Multi-Asset & Hong Kong Pensions, discusses the latest market happenings and how pension investors should position themselves

Mar 22, 2018 | Paul Chan

The recovering and growing risk appetite since the Global Financial Crisis has given rise to various structured investment products in the last 10 years, among which is “inverse volatility” investment instruments, which are, in essence, tools that allow investors to gain by betting on a continued lack of volatility in the market. These investments attempt to artificially depress volatility (which has remained sedate throughout 2017) to boost the equity market’s performance, finally culminating in market overheat.

The problem is that this is essentially a bet on market direction rather than an investment. Volatility is an effect, not a factor. When people invest in equities and the market is stable, volatility naturally goes down. When volatility spikes up, like in this market sell-off, “inverse volatility” investments can cause heavy losses.

As “inverse volatility” investments have experienced a massive erosion, I do not expect volatility to return to its previous low. Risk premium is expected to rise to some extent, deterring investors from being too aggressive. The caution induced, in my opinion, will be advantageous to the overall market health.

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