Making money in a low-volatility environment is tough.
When the market is devoid of price swings, opportunities to capitalise on inefficiencies can be few and far between. Skilled money managers have less to work with, and the fundamental analysis that normally goes into investment decisions can give way to a pack mentality where investors are stuck chasing the same crowded trades.
Luckily, Goldman Sachs recognises all of this and has a few ideas to help traders navigate these stagnant times.
First and foremost, investors should be looking to buy stocks. The S&P 500 in particular has seen large risk-adjusted returns relative to other asset classes in low-volatility periods since 1990, according to Goldman data.
Looking beyond the level of returns, Goldman also finds that stocks see the biggest improvement in risk-adjusted performance relative to history when price swings are muted. By this measure, non-US equities are actually the biggest winners, specifically emerging-market, European and Japanese stocks.
Goldman also recommends buying high-yield bonds, but notes that their outperformance relative to other asset classes isn’t unique to low-volatility periods.
As such, the firm advises investors to hold overweight positions in global equities and neutral positions in credit.
“Credit and equity tend to have the best cross-asset performance during low vol periods, while bonds and commodities underperform,” a group of Goldman strategists led by Ian Wright wrote in a client note.
One area to avoid is the Treasury market, says Goldman. While low-volatility periods have historically translated into strong returns for government bonds, this time it’s different.
In the past, coupon income has been able to counteract any losses from rising rates. With that source of capital dwindling, Treasuries are now much less appealing, according to the firm, which recommends an underweight position.