Advisors must be ready to manage the psychology of investing now volatility has returned to “normal” levels.
A relatively flat VIX chart, which investors have got used to since the last financial crash, was an unrealistic environment, according to HSBC Bank of Canada’s CEO of Asset Management Marc Cevey, who believes the main concern about volatility is the fear and anxiety it invokes.
“Investor sentiment can change on a dime because of that,” he said, adding: “You look at the VIX chart until recently and it was flat, you couldn’t find a line!
“That was not a realistic environment but the trouble is that is what investors have got used to. The psychology of it is what advisors and fund managers like ourselves have to manage.
“For advisors and the retail investor, it’s about managing that anxiety and setting the expectations. The market crash in 1987 was a 500 point day, but now that's [a case of] so what to a certain extent. That needs to be factored.
“If you are an investor, volatility only matters if you try to time the market. If you don’t time the market and continue to invest on the regular basis, it evens out.”
According to a Bloomberg report, the markets suffered shockwaves yesterday across assets, with the rising threat of a government shutdown and the debate over whether the Fed has set itself up for a policy error with this weak interest rate hike. The dollar sank with crude oil, while the S&P 500 tumbled to a 15-month low and the NASDAQ Composite index slumped to the brink of a near market.
Cevey said that while the impact is causing some sweaty brows, he would argue that it presents investment managers with an opportunity.
He said: “The environment is going from what was blatantly a growth environment in equity markets to growth at a reasonable price – valuations matter again, surprise, surprise!
“Volatility creates corrections and corrections translate into changes in valuation. Unless the fundamentals of the company and economy have changed, we usually tend to buy the dips. We actually take advantage of valuations; it just lends itself very well to our investment style.”
Meanwhile, on the domestic front, Cevey predicted a similarly stodgy year in 2019 for Canada because of headwinds – more than the US – and the bottleneck in the energy sector. The tariffs on steel and aluminum remain as do the counter tariffs against the US, adding to the challenges.
He said: “There is an obviously continued dependence on the US and concern on tariff policies, period. Tariffs are a tax as we know – there’s no positive and they are seen from the White House as a negotiating measure. They’ll argue they have been very effective, although the rest of the world will argue differently, but there’s a real risk of overshoot.”
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