Normal volatility

General volatility normalizing.

Annual volatility as measured on a daily basis over the past 20 years, has risen since 2015, but this is a normalizing after some years of low volatility from quantitative easing programmes. It now actually stands near its 20y average over asset classes for SKAGENs funds (+ commodities). We could see increased volatility from some seemingly already extremely highly priced companies (according to an insight report there is ca. 150 private tech outfits led by teenagers valued at USD 1bln+ in the US alone.). Even without any shocks, volatility is likely to increase from structural changes: more high frequency trading and withdrawal of broker dealers have hurt trading liquidity in outdated market structures and this can give larger price moves.

*) The DXY index i.e. USD vs a basket of major trade currencies for USA (EUR, JPY, GBP, CAD, SEK, CHF)

Over the past 5 years we see that a QE induced period of low volatility is now over and (despite QEs are set to continue), volatility has risen again fueled by political uncertainties. This is mainly connected to developments in the US and UK w.r.t. elections and the EU referendum, the interest rate setting from the Fed, growth uncertainties and spillovers from negative such in Russia and Brazil as well as fears of more unrest in the Middle East and uncertain Chinese growth.

For the rest of 2016 a global investor should also be aware of risk for QE effectiveness in especially Europe, a possible Chinese renmimbi devaluation as well as induced technological disruptions from rising costs from EM countries.