Volatile times are here to stay

July 14, 2015, 2:45 pm Aaron Lynch Yahoo7 Finance

Volatility is the one thing that can derail a long-term investment plan quicker than any other event.

Volatile times are here to stay, but they are slipping back from the peak uncertainty of last week as concerns over Greece and the China bubble play out.

For any investor, volatility is the one thing that can derail a long-term investment plan quicker than any other event.

Overnight we have seen the Greek Government agree to terms on another bailout, and this time conditions and oversight from the European creditors will be significantly more stringent.

Many would argue that this is well overdue, yet opinion is in two camps on Greece’s self-inflicted wounds.

The country does not have a great track record in matters such as financial management, and as such any loan to this debtor may be seen as risky.

The Volatility Index, VIX , is a useful guide to visually identifying shifts in market jitters. To put it all in perspective - Chart 1 outlines a monthly line chart on the value of the VIX over the last 7 years.

A reading above 20 suggests the market is nervous, current levels around 15 suggest a healthy market and numbers bigger than 30 suggest a very sick environment and are extreme.

As news of the Greek deal being accepted is announced, the previously increasing momentum in volatility has begun to fall away.

The next challenge for the region will be getting this new deal through Parliament in the next 72 hours, which is one of the strict conditions mentioned above.

This is a difficult manoeuvre against the backdrop of a Greek referendum which rejected the austerity measures in an overwhelming majority.

A possibly larger concern to our domestic market is that the Chinese market has derailed both in terms of performance and its ability to operate as a free market. As China has emerged in the financial landscape, there have always been concerns over how transparent the market actually is.

The recent intervention has demonstrated a lack of experience in dealing with market volatility. Some of the recent widespread suspension of stocks, bans on short selling, forced capital injections and an overall aversion to allowing the market to find its own equilibrium is disturbing.

In most cases history shows that manipulation of markets during panics rarely end well. In this instance the main damage has been to China’s “A” share market. This “A” market is mainly available to domestic investors.

Comparatively, the “H” shares listed in Hong Kong are mainly traded by international investors and have experienced significantly less volatility.

This could be a lesson that having one exchange with transparency could mitigate volatility? It is also notable that the “H” shares trade at a significant discount to “A” shares. This difference in spreads is a dynamic environment, with the spreads closing in recent times in line with the volatility.

The domestic economy in Australia is heavily weighted to China’s fortunes. Where we go from here will revolve around how quickly the Chinese market can stabilise after it fully reopens, and whether any further stimulus is forthcoming to drive growth to the 7% target that has been outlined.

The Greek situation makes for great headlines, yet in terms of volatility drivers China is the real deal. Hopefully, we will soon see a return to normal market conditions, and a reform plan that allows more access and transparency from outside China.

Until then, it’s unlikely that we’ve seen the end of volatility. Remember - investing is for the long haul but it’s never that easy.

Good Trading

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