Embrace the fear

Sharemarkets are the most volatile they’ve been in the past 20 years. Increased uncertainty, fear, forced and panic selling, as well as reduced liquidity, are all contributing factors and all measures show a recent spike in and currently elevated levels of volatility.

To understand the extent of the current volatility we used a simple measure using intraday price fluctuations. We measured the daily trading range for each of the shares in the S&P/ASX 200 Index and expressed it as a percentage of their opening price. A simple average across all 200 index constituents gives an equal-weighted average of the intraday volatility, expressed as a percentage. You can see the formula we used below:

The graph below charts this intraday volatility since 2000, with the average being 2.8%. March 2020’s intraday volatility, however, was greater than at any other time and significantly exceeded the peaks during the Global Financial Crisis (GFC) between 2007 and 2009.

In March this year there were nine trading days with volatility above 10%, seven of them consecutive. During the GFC there were only four days in total with greater than 10% intraday volatility and no consecutive trading days. 

Recent volatility has far exceeded other extreme world events which represent peaks in the chart below, including the September 2001 terrorist attacks, the collapse of Lehman Brothers during the GFC, Black Monday on 8 August 2011 (which followed the credit rating downgrade of US sovereign debt), the US and Chinese flash market crashes of 24 August 2015 and news on Donald Trump’s likely election victory on 9 November 2015. Despite having fallen from its peaks, volatility remains about twice the average.

Graph: Intraday volatility of the S&P/ASX 200 Index since 1 January 2000

Source: Allan Gray; acknowledgements: JP Morgan

Don’t fear volatility. Embrace it

With elevated volatility, you could be forgiven for looking at this graph and wanting to run for the hills. But the reality is that volatility is your friend when investing for the long term, with the at times extreme fluctuations in price presenting excellent long-term buying opportunities.

The causes of the current bout of volatility are certainly different and it is unclear if they warrant the elevated levels of volatility we’ve seen relative to other cycles. But in each of the previous bouts of market volatility, significant opportunities were presented to long–term, patient investors. It is hard to believe that this will be any different today.

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Contrarian investing is not for everyone, however there can be rewards for the patient investor who embraces Allan Gray’s approach. To stay up to date with our latest thinking, hit the follow button below or contact us for further information.

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Simon Mawhinney
Managing Director and Chief Investment Officer
Allan Gray

Simon joined Allan Gray in 2006 as an analyst. Before this, he was at Alliance Berstein, Macquarie Bank, and Deloitte and Touche. Simon has a Bachelor of Business Science with first-class honours (majoring in finance and business strategy) and a...

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