At the time of our March contribution to this column, the market volatility index was trading below a reading of 20. Our forecast was that this “fear gauge” would “at least double over the course of the year as the dual risks of sovereign stress and a slowdown in growth collide”.
Since that time, the Vix has indeed more than doubled, recording a low of 15.6 on April 12, and a high of 45.8 on May 20. At the time of writing, the Vix is reading 33.7. The S&P 500 has fallen by close to 15 per cent from its April high.
Does this represent a buying opportunity? The somewhat indiscriminate nature of this setback to date, that is, one that has not been coupled with a clear rotation in sector leadership – leads us to remain sceptical about the prospects for risky assets over coming months.
We believe the growth outlook for the remainder of this year looks dismal. A number of leading indicators continue either to decelerate or fall significantly, suggesting the days of sequential improvement for the economy are as good as over.
In our view, now is the time to step away from the cyclical sectors that worked so well during last year’s stimulus-led growth period.
This is particularly the case as we believe that policymakers are now constrained in their ability to respond to this renewed downturn in the economy.
Sovereign debt stress will likely be with us for years to come and will not be exclusive to Europe.
In many countries, there is no historical precedent for debt reduction from current levels that did not involve crisis, default or inflation.
Achieving debt reduction from here will not be an easy task. There really are no good options left in many developed economies.
Our strategy is to remain patient and wait for a better entry point as the year progresses.
Robin McDonald is co-manager of the Cazenove Capital multimanager range of funds