New research has shown that leading stock markets, including the FTSE 100, are much riskier places to invest than they were in the past, as unpredictable fluctuations in value have become more common.
Britain’s index of 100 leading shares has become a shocking five times more volatile over the past ten years, according to a study by HSBC Global Asset Management. Their method involved counting the number of occasions when the market fell or rose by more than 3 per cent in a single day. This happened 22 times during the 1990’s and 106 during the 2000’s.
This increase in volatility is part of a global trend which shows no sign of abating. In the USA the Standard & Poors 500 index saw 3 per cent plus swings on 125 days in the 2000’s and the Morgan Stanley Countries Index, a world equity index, saw this happen 59 times during the decade, compared to 13 in the 1990’s.
Given these statistics, it might seem like the best thing to do is stay away from stock markets altogether, however; according to Meike Bliebenicht of HSBC Global Asset Management, this might not be necessary:
“Loss periods are often followed by strong rallies on the stock market. In June of this year the MSCI picked up by more than 5 per cent over a few days.”
In the long upward trend that preceded the financial crisis of recent years, many investors became complacent. Recent trends, however, make it clear that ‘spread risk’ is an essential strategy and investors must now avoid putting all their eggs in one basket.
“Combining assets which are not perfectly correlated can be used in attempting to smooth the overall investment experience, particularly in the current climate of fluctuating sentiment and elevated macro-economic risk” continued Bliebenicht.
Many experts are also advocating the usefulness of P/E (price/earnings) ratios as a useful indicator of a stock’s value. These express the current share price as a multiple of earnings, in other words telling you how many years earnings will be needed to pay for the stock at current levels.
Robert Walker of Jupiter Asset Management explains: “Equities on the FTSE 100 are currently valued on a P/E of 11.4. In 1999 shares were twice as expensive relative to their earnings at the time”. This means that shares offer significantly better value than they did 10 years, but the volatility of them will scare away the majority of investors while prices remain this low.