Volatility set to continue in 2023
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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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.
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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