Simon Ho

Market volatility in 2017 will continue to be episodic – rather than prolonged – although asset price distortion will ultimately rectify during the year and be the forerunner of a downturn and increased average volatility in 2018, according to Simon Ho, chief investment officer, Triple3 Partners.

“This is going to be a very interesting year,” Mr Ho said.

“Despite market commentators talking about high levels of volatility in the past year, it actually was not very volatile. Although the volatility index – the VIX – rallied six percent, it started from a very low base. There were a few volatility spikes during the year – but no ongoing activity.”

Mr Ho says there will be some key drivers of market volatility in 2017.

“The first will be the US dollar. The second will be oil and commodity prices – which are intermittently linked to the movement in the dollar. The third will be interest rates and we think that the Fed could be behind the curve here, resulting in a faster pace of interest rate hikes.

“We are already seeing green shoots of inflation – even in Europe – in the most recent data. We are certainly expecting inflation in the US, and President Trump pump priming the economy, will also impact inflation.

“Any one of those three drivers could potentially cause a crack in the fabric of global economies.

“If rates surprise on the upside – and President Trump’s policies feed into that – a market downturn is inevitable for 2018.

“A depressed US market is bad news for global economies. If you look around the world, stocks globally are priced at fairly high levels, and a rapid rise in rates could see a lot of that come undone.”

In this environment investors would be well placed to position their portfolios – using options over the VIX – to prepare for these bouts of episodic volatility ahead of a potential market downturn in 2018, Mr Ho said.

“This strategy means investors can put some negatively correlated assets into their portfolio, which will help them profit from periods when markets turn down and volatility rises.

“Generally speaking, people want to own equities because over the long run they do well. Allocating a portion of the portfolio to a volatility strategy can help to mitigate or circumvent the losses that come when the markets go down.”

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