(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Jamie McGeever
LONDON, Feb 21 (Reuters) - The recent surge in market
volatility, by some measures one of the most dramatic on record,
will have zero impact on investor returns beyond a few months.
That's according to Credit Suisse's annual Global Investment
Returns Outlook, a 250-page tome analyzing world investment
trends since 1900, as close to a bible on long-term market
patterns as you're likely to find.
Their advice is to hold on tight, sit out the current
turbulence and watch stocks resume the uptrend that has seen
them consistently outperform bonds and cash on average over the
last 118 years.
In fact, the turbulence that wiped $4 trillion off the value
of world stocks earlier this month is already fading. The study
found that it took only seven trading days for the VIX index to
revert back to the mean following this year's "February funk".
That's the quickest implied U.S. stock market volatility has
reverted to the mean of all 13 crisis-fueled spurts since 1986,
the study finds. The average is 92 trading days.
The long-term average rate for the VIX, also dubbed Wall
Street's "fear index", is 20 percent. For months it had been
anchored at record lows around and below 10 percent. According
to the report, 2017 was the 5th calmest year on record.
But on Feb. 5 the VIX had its biggest one-day rise ever,
popping above 50 percent for only the second time since the 2008
World stocks lost 10 percent and suddenly, it looked like
the post-crisis "Goldilocks" world of Teflon markets and
ultra-low volatility might be coming to an end. But history
suggests otherwise, the Credit Suisse study finds.
Jumps in implied volatility are a decent predictor of actual
volatility over the coming one, two or maybe even three months,
but nothing beyond that. Literally.
"Volatility is a reminder that equities are risky ... but
you shouldn't really read too much into volatility changes,"
said Paul Marsh, one of the report's co-authors. "The VIX
doesn't predict returns."
The study shows that the relationship between next year's
equity returns and last week's VIX changes is non-existent. The
statistical measure of this is called "R-squared", where 0 shows
no correlation and 1 is a perfect, 100 percent fit.
"This is the first regression (analysis) I think any of us
have ever done when we got an R-squared of 0.000, i.e, nothing
there. Nothing," Marsh said.
There have been 197 episodes since 1986 where the VIX has
risen at least 20 percent from the previous week, 87 where it
has risen at least 30 percent, 46 where it has risen at least 40
percent and 22 where it has risen at least 50 percent.
The subsequent one-year U.S. stock market returns have been
12.6 percent, 10.8 percent, 10.2 percent and 12.5 percent,
respectively, the report finds.
Investors should maybe keep this in mind when volatility
suddenly appears, although as Marsh notes, their instinctive
reaction is to run for cover. This is exactly what happened
earlier this month when mutual fund investors pulled a record
$30.6 billion out of world equity funds in the week to Feb. 7,
according to Bank of America Merrill Lynch.
If you're in it for the long haul, however, equities are a
relatively good bet compared to bonds or cash, although that
doesn't mean rates of return will increase in the coming years.
In fact, low real interest rates should depress returns.
Since 1900, equities have outperformed bonds and cash in
every one of the 22 countries tracked in the study. World
stocks' annualized real return has been 5.2 percent a year since
1900, compared with around 2 percent for bonds and 0.9 percent
The equity risk premium (real equity return less real cash
return) since 1900 has averaged around 4.3 percent. But for the
next 20 years that will shrink to around 3.5 percent, the study
"When real interest rates are low, so are expected returns,"
the report notes.
(Reporting by Jamie McGeever; Editing by Raissa Kasolowsky)
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