The complacency conundrum

With developed equity markets still posting very strong risk-adjusted returns, are investors complacent or not?

10 Oct 2017

On October 19 1987, the Dow Jones Industrial Average fell 22.6% as concerns about valuation were exacerbated by new program trading techniques and systematic hedging strategies. Thirty years later, at least some of the characteristics of Black Monday are beginning to echo uncomfortably.

With developed equity markets still posting very strong risk-adjusted returns, are investors complacent or not?

  • Very low levels of implied volatility have not prevented equity returns from rising historically; major drawdowns have all occurred from higher implied volatility starting points
  • MSCI World’s 436 trading days without a 5% drawdown over three months is fifth longest since 1969—but lags significantly behind 736 day record
  • QE reversal likely to have only marginal impact on market volatility in 2018
  • High degree of skepticism about valuations and constant challenge to market supports in contrast to peaks of previous market cycles
  • Rising geopolitical risks, extended hedge fund positioning and a new Fed chair have the potential to disrupt markets in the short-term but we see scant evidence of widespread complacency
  • Strong macroeconomic backdrop, valuation support against bonds suggests further upside to equity markets

More Market Update articles

Disclaimer

This website is intended for persons resident in Australia only and should not be relied upon by persons from any other jurisdiction. UBS Asset Management (Australia) Ltd ABN 31 003 146 290, AFS Licence No. 222605 is the product issuer of investment funds listed on this website. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation or needs. Any potential investor should consider the relevant product disclosure statement (PDS) in deciding whether to acquire, or continue to hold units in a fund. Please consult your financial adviser. Past performance is not a reliable indicator of future performance.

Offer not to persons outside Australia

The PDS does not constitute an offer or invitation in any jurisdiction other than in Australia. Applications from outside Australia will not be accepted through the PDS. The funds are not intended to be sold to US Persons as defined under Regulation S of the US federal securities laws.

Read more about our privacy policy and UBS AM Principles of Internal Governance and Asset Stewardship

© UBS 1998 - 2020. All rights reserved

Reset