With volatility indexes like the VIX at record lows, there are plenty of reasons for equity investors to expect a more bumpy ride in 2018, says AMP Capital.
AMP Capital chief economist Shane Oliver has laid out five reasons investors should expect an increase in share market volatility in the coming year.
First, the prospect of rising inflation is likely to result in a more aggressive US Federal Reserve than the market is allowing for, which would cause volatility to head upwards, Mr Oliver said.
Mean reversion could play a role as well, he said – noting that volatility has not been this low for years.
"Low volatility years like 2017 often lead more volatile years," Mr Oliver said.
"Volatility indexes like VIX are around record lows and net speculative short positions on VIX (bets volatility will fall further) are near record highs, warning of some reversal."
Geopolitical undercurrents could start to play a role as well, he said – noting that US President Donald Trump could become more populist this year.
Finally, the US share market is looking expensive on some measures, and a downturn would result in higher volatility, Mr Oliver said.
However, a deep 'grizzly' bear market (where shares fall 20 per cent and a year later are even lower) is unlikely, he said.
He put his optimism down to the fact that a recession is unlikely, the lack of euphoria among investors (other than in the bitcoin market) and the positive "liquidity backdrop" for shares.
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