Stock Markets: Episode VI: The return of volatility

13 März 2018

After last year’s calm equity markets had almost lulled investors to sleep, February came as a rude awakening where the VIX shot up to ‘fear’-levels that hadn’t been seen since China devaluated the yuan in 2015. The spike in implied volatility went hand in hand with a rather substantial correction, where global equity indices quickly fell by 6% during the first week of the month.

Luckily markets got some tailwinds from positive macro-economic data: strong GDP growth in the Eurozone, a robust labor market in the United States and continued monetary easing in Japan clearly brought investors “A New Hope”. Subsequently, global indices started their recovery and ended the month on a modest loss of 2.15%.

Both our funds recorded some outperformance during February. Vector Navigator ended the month on a 1.91% loss, which was 25 basis points better than the MSCI All Countries NR Index. Flexible fell by just 1.2% in February. For now, we still feel that most of the good news, such as the strong economic growth and increasing corporate profits have already been largely incorporated in the prices. Potential bad news, such as an inflation shock or a sudden change in the policy of the central banks on the other hand may not be sufficiently reflected. And as we just saw, sentiment can change quickly… This is why we currently hedge about 40% of the market risk in Vector Flexible, which is slightly more than the market timing model suggests.

In case you’ve missed our special issue on the subject, last month we were able to turn many of the nominations we had received into physical awards: Vector Navigator won the Morningstar France, Germany and Belgium Award for best Global Equity Fund and Vector Flexible won the Morningstar Belgium and De Tijd/L’Echo Award for best Flexible Allocation fund! Now only the Morningstar Luxembourg award ceremony remains…