Worries about market volatility may well be exaggerated, according to ABN Amro’s Global Investment Returns Yearbook 2008. The yearbook, released last week, takes a long term overview of markets in 17 countries using a 108-year history of asset returns.
The authors found that, going into 2007, volatility was almost at a record low and so a rise was to be expected. Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School acknowledge that there has been an extraordinary switch in investor sentiment since the subprime crisis hit in summer 2007. They report, however, that the recent volatility spikes are nowhere near historical highs.
Using the Vix index, which measures annualised standard deviation implied by S&P 500 option prices to demonstrate market expectations of volatility in the American market, the peaks since August can be seen to hit about 31%. This figure pales in comparison with the 150.2% seen after Black Monday in October 1987 and also falls short of highs reached during the 1997-8 Asia financial crisis and the bursting of the dotcom bubble in 2000.
What may concern investors, however, is the performance of equities so far this decade. Since 2000 equities have only marginally outperformed inflation, giving average annual returns of 3.4% against 2.9% average inflation over the same period. The authors say that if the figures for January 2008 were added, returns from the asset class would fall to 2.2%.
Even without the January figures the returns from equities were less than those from treasury bills (4.8%), long bonds (5.1%) and index-linked gilts (6.1%).
For the first time, index-linked gilts were the best-performing British asset class in 2007, with average returns of 8.5% against 4% from equities.
The poor results reflect one of the worst bear markets in history between 2000-2002. At the trough, American stocks had lost 47% of their value and British stocks had fared little better, shedding 44%.