When writing this blog in recent weeks, the lack of movement in asset prices has given challenges as what to comment upon. Plenty of ink has been spent on the lack of volatility or when the central banks of the UK and US will look to raise rates and when the ECB will look to do the opposite. We also often speculate on the lack of volatility, but why does it matter? Surely a lack of asset price volatility should bring comfort not fear. The common held belief is the concern that a lack of volatility leads to complacency and excessive risk taking; this view many believe led to the crisis in 2007. One of the positives to asset price volatility is that it often gives rise to opportunities.
If you dig deep enough there are always a few events during the day to make one sit up and think. There were two pieces of news that grabbed the attention on Tuesday, one that might cause a little volatility in the short term; the other demonstrates how some of the most experienced people can come to the oddest conclusions.
The Dubai stock market fell nearly 7% as a slide in construction firm Arabtec triggered a broader sell-off in equities. The sell-off in Arabtec shares seems to have started earlier this month as the Abu Dhabi state fund looked to reduce its holding. This led to the resignation of the Chief Executive Officer and a layoff of a significant number of staff. The reason we draw attention to this is because many people will remember shortly after the world tried to come out of the effects of 2008, early in 2010 concerns over Dubai's ability to fund itself after the years of construction caused a major wobble in asset prices. Nerves were only steadied after Abu Dhabi stepped in to underwrite some of the loans. The fall in Arabtec shares that has seen it lose 50% of its value in the past few weeks has caused wider contagion as traders look to meet margin calls. What it also reminds us, that as much as everyone expects the next bout of volatility to come from a misguided central bank comment, the greater likelihood is it comes from a direction no one expects, just as it did in 2007.
The other piece of news that grabbed the eye was from Norway’s $890bn wealth fund, the world's largest. The fund owns 1.3% of the worlds stocks, and is now looking towards frontier markets to improve returns, having failed to meet a real return of 4% target since inception in the late 1990's. Norges Bank Governor stated that the fund must take on more risk to generate greater returns. If I had a pound for the number of times that phrase has been uttered in my career, I would be competing with Norges Bank. When have you ever heard Warren Buffet use that phrase, never? To our mind It is not about taking more risk, it’s being wise in the risk you are taking.