With Volatility Comes Opportunity

Uncertainty continues to dominate global securities markets and heightened volatility is the result. Feifei Li, partner and head of equities, asks Rob Arnott, the founder and chairman of Research Affiliates, about the implications of increased volatility on investment strategies and where investors can find the best opportunities.

Feifei Li: What do you make of the current volatility environment?

Rob Arnott: Whereas heightened market turbulence can stir fear, panic is unhelpful. Volatility can be our friend if we’re ready to reassess which markets or assets are newly formed deep-value opportunities and which remain fully priced and to trade accordingly. As I’ve frequently said, market volatility can serve investors well if viewed as a means to respond to opportunities.

Volatility has spiked. The VIX Index peaked above 80 on March 16, over fivefold higher than its long-term average level. Investors who average into markets that are priced to deliver attractive return prospects are reliably rewarded in the long run, as long as they are patient.

The COVID-19 pandemic is an unprecedented shock to the economy, but only one of the catalysts for the current market volatility. Prior to the virus’ outbreak, we noted various warnings from the macroeconomy, credit conditions, and asset class valuations that indicated the capital markets may have been approaching an inflection point.

The extent and duration of market turbulence may depend in part on the level of contagion the shocks generate within the financial system and the response from governments and central banks. While many banks are much better capitalized today than they were during the global financial crisis, interest rates are already effectively at zero. Moreover, following more than a decade of global quantitative easing, sovereign debt in all the major economies is at historically high levels. If the responses from the government and central banks are not measured, the risk of inflation poses a potentially severe threat to sustained market volatility.

Feifei: In your opinion, which have been the worst performing strategies during the sell-off?