Until two weeks ago, volatility on the financial markets appeared to be a thing of the past with little or no action on the equity markets. This has changed within the space of a few days. The VDAX, which is derived from the DAX option contracts traded on Eurex and measures the expected volatility of the DAX for the next 30 days, closed above 40 points.
If the expected volatility is interpreted as a stress indicator, the uncertainty on the German equity market is currently as high as it was at the time of the Brexit decision in June 2016 or after the Chinese equity market crash in August 2015.
Investors who now expect the volatility on the equity market to fall again soon towards the average (19 points in the US / 20 in Germany) could be disappointed at first. Empirically, the volatility suggests a slight tendency towards a slow mean reversion. We still anticipate a heightened volatility plateau for the time being.
Volatility spikes offered good buying opportunities in the past and we see this as also being the case in the current market situation. The long-term trend on the equity market still depends primarily on the companies‘ earnings situation rather than on central bank policy or similar factors, even though these can be a source of recurrent uncertainty and volatility. The DAX PER estimate is only 11.5 points and the dividend yield 3.6% – these were good buying opportunities historically.
Companies in Germany are currently reporting record sales and in view of the global economy that is performing very well and persistently low interest rates, we are unlikely to see a reversal of this trend in the short term.
In our view, fundamental data will continue to support equities, which should outperform bonds and cash in the years ahead. There will also be sporadic outbursts of anxiety, possibly due to geopolitical events, as global economic matters are otherwise going well. We recommend using such occasions to invest in companies that were penalised excessively in such a dip in share prices.