Yesterday RBA Assistant Governor Guy Debelle warned traders about the possibility for a big spike in volatility from current levels which he said are still low.
Debelle warned that any selloff in bonds and other assets could be “violent” because of the starting point of zero interest rates and lower liquidity in markets than in the past. Ominously though, as if to underline the point Debelle said, “if we look back at previous market sell-offs, when market-making capacity was larger, we see that they were often quite violent too.”
But traders and investors shouldn’t be too worried about the potential for a spike in volatility according to Sheila Patel, CEO of International Goldman Sachs Asset Management.
Somewhat contrary to conventional wisdom Patel told The Australian that the increase in volatility was “part and parcel” of an increase in risk appetite.
The interesting thing for me is a relatively broad-based increase in risk appetite over the course of this year by major investors. It has taken time though. I wouldn’t say everyone is ploughing in but the types of increases we have seen and the variety of the areas of interest is very interesting.
This suggests that the increase in volatility and the breakdown in what was a very high correlation across global traded assets and markets is actually as a result, not of fear, but of active asset allocation by investors.
That is a very different take on the spike in volatility and counter to the warning from Debelle. Patel highlighted that part of the result of investors moving money around is that, “in many cases, they look at the volatility as part and parcel of the shift. Very few shifts like this happen without an extended period of volatility while people make up their minds.”
Patel’s view doesn’t mean that Debelle is wrong but it is a clear signal that there are still many opportunities in markets and that this is not “the end” but simply an adjustment to a changing economic landscape.
You can read the full story here.