Volatility set to continue in 2023

Bruce Apted from State Street Global Advisors gives his view on how volatility to shaping up for 2023.
Bruce Apted

State Street Global Advisors

The economy is delicately balanced at the moment with larger than normal uncertainty in the future path of company earnings and interest rates. Central banks are walking a fine line with risks of being either too tight or too accommodative. While uncertainty remains for these key elements we should expect more wild swings in equity prices. Figure 1 below shows the CBOE volatility index with the overlay of the US economic recessions. Historically periods of economic slowdown have seen increased economic uncertainty and higher levels of volatility.

The more uncertain the calculation of fair value the greater the role for investors’ animal spirits1 of fear and greed to influence price determination and further exaggerate volatility.

As investors digest recent earnings trends and global macro risks we have seen investors turn more bearish in February. Figure 2 below highlights both the wild swings in returns for the MSCI World Index since 30th June 2022 as well as the persistent down trend in earnings. Equity investors are trying to look through the current earnings slowdown but the longer the trend remains negative and the more uncertain the economic outlook the harder it becomes.

Investors Favour Fundamentals in February

The S&P/ASX 300 Index has also given up ground in February. We have seen Australian investors favour companies with lower volatility, better valuations, higher quality and larger capitalization. Figure 3 below reports the quintile spread returns for several standard company characteristics for the S&P ASX 300 universe of stocks in February so far.

The Bottom Line – Continued Volatility Favours Quality, Value and Lower Risk

The economic environment is especially delicate at the moment. Investors are trying to look through the current earnings slow down but it is getting more difficult. With the increased economic uncertainty we should expect continued volatility. The preference for value, quality and less volatile securities is likely to remain an investor preference whilst these concerns persist.

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Issued by State Street Global Advisors, Australia, Limited (AFSL Number 238276, ABN 42 003 914 225) (“SSGA Australia”). Registered office: Level 14, 420 George Street, Sydney, NSW 2000, Australia · Telephone: +612 9240-7600 · Web: ssga.com. The views expressed in this material are the views of Bruce Apted, Head of Portfolio Management – Australia, Active Quantitative Equity Team through the period ended 23 February 2023 and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. Investing involves risk including the risk of loss of principal. 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Bruce Apted
Head of Portfolio Management – Australia, Active Quantitative Equity
State Street Global Advisors

Bruce is Head of Active Quantitative Equity - Australia, for State Street Global Advisors. He has over 20 years' experience, covering Australian and global equites, long and short equities as well as global macro strategies.

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