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Bit of an early note this week as I’m going away this weekend (camping down at Skenes Creek) and won’t be back until Monday arvo.
In times like this, uncertain and unnerving, I like to stick to the things I know. The things in my control. The things I understand. The facts vs ‘the feels’.
I took some time today (Friday) to look at 1 yr forward ASX 200 returns when the Volatility Index (VIX) is above and below 30 (it’s currently 33.5), going back 10 years, on a daily basis. Using an average of all the days as benchmark, and returns are inclusive of dividends and assume reinvestment. It doesn’t include this recent pull back because, obviously, I can’t observe returns 12 months into the future.
|Ave. 365 day returns (%)||ASX200||Min Value %||Max Value%|
|VIX under 30||9.98%||-28.83%||45.22%|
|VIX over 30||26.77%||-15.73%||58.76%|
Standard Deviation is c.13% for both sample sets. So “risk” of buying stocks at high and low volatility index levels is about the same.
There are 302 days where the VIX closed over 30 with only 11 days yielding a negative outcome. Of those 11 times, returns averaged -4.08%. But that is only 3.6% of observations. That’s a 96.4% positive return outcome.
1123 days in total, so VIX shoots up like this about 26 days in every 100, so it’s not unusual, but also relatively infrequent. This is a good example of investor’s natural bias to the negative. We remember the bad times more easily (and often, they feel more frequent, protracted and worse) than we do the good times. Despite the good times being much more common.
In summary, and whilst history is not a predictor of the future, statistics do not lie in the long run. Almost all things mean revert, returns are pretty normally distributed. And statistics tell us that this is not a time to be feared, it’s a time to be excited that there’s a sale on your favourite companies and we can buy more than we could previously afford. With higher volatility, comes higher returns (and if you doubt this for a second, review the statistics in the table).
How can you make money out of this?
If you like the look of these odds, how could you potentially exploit this?
Option 1: Vanguard do a cheap ASX 300 ETF (code is VAS) which will give you exposure to the ASX300 index. Or you can pick one of the MSCI All-World Ex-Australia indices if you prefer global stocks. ETF provider websites have all the fact sheets and details (or you can just email me and I’ll help you).
Sometimes buying ETF’s in the US or Europe is cheaper, particularly if you don’t intend to hedge the currency exposure anyway, so let me know and I can help you out.
Or pick some stocks you like. I’m bearish the AUD against almost all other currencies, so I’m looking primarily among non-AUD earners like: MQG, WPL, AMC, CSL, COH, ALL, TWE, JHG, IVC etc.
Reporting season has kicked off with results of interest from Janus (JHG), CBA, AGL, AMP, Tabcorp (TAH), NAB and Realestate.com.au (REA). As always, I won’t go through things in great detail, suffice to say Janus result was good on a lot of measure, though missed expectation on net funds inflow. CBA was ok’ish but no growth, AGL and TAH both were kind of poor, NAB was fine and AMP was good but not great (turnaround story, but a bit early for me yet). REA looks ok with 20% revenue growth.
Next few days we have:
AMC, BEN, JBH, PPS, CPU, CGF, BLD, COH, CSL, WPL, VCX, DMP, ASX among others.
Meanwhile in the US:
Earnings season continues to roll on with just under 60% of the S&P 500 having now reported. According to FactSet’s Earnings Scorecard, the blended growth rate for Q4 S&P 500 EPS now stands at 13.5%, up from 11.0% at the end of the quarter. Nearly 76% of reporters have beat consensus EPS expectations, ahead of the 72% one-year average.
And wages might not be as strong in the US as the numbers show. The Wall Street Journal noted wage gains were not widespread as a separate gauge for non-supervisory workers, who account for around 80% of employment, rose just 2.4%, in the same lackluster range that has prevailed for years. They also point out that most of the wage gain came from the smaller subset of workers in supervisory or non-production roles, who saw wages increase 5% on the year. On top of this, a recent note from Goldman Sachs reckon that in the long run, because wage growth is so concentrated (resultant from firms in Silicon Valley paying lots, whilst most other firms aren’t) there might some downside risk to its 3-3.25% longer-run wage growth estimate
The markets had a pretty vicious 5 days or so, can’t say I’m enjoying it. Just trying to remain objective and focus on the companies I want to invest in and remember that we don’t make money over a week or a month, but over the cumulative effects of many, many years.
Not much to talk about on the upside, IDP Education had a ripper result. It’s a foreign language/international student education business. I had a look at it recently, but not sure about the structural tailwinds. Going to have another look post reporting season as result was very impressive.
I’ve had to limit the negative stock moves this week to double digit declines (normally I do -5%). Zip Co (Z1P) holding up ok at $1.11.
Alright, that will do me for this week as I’ve got a busy day today as you can imagine. Call me with any questions or concerns. Even though I’m away, happy to take a call for clients.