Global money managers and analysts are split on whether markets and investors are becoming complacent and disconnected from potential sources of market volatility, as the Chicago Board Options Exchange Volatility index — the VIX — dips to decade-low levels and leverage in credit markets creeps higher.
The VIX closed at 11.19 on July 7, as Pensions & Investments was going to press. The 52-week range is between 9.37 and 23.01. The index measures the implied volatility of Standard & Poor's 500 index options, showing expected market volatility over a 30-day period.
Some money managers are becoming concerned that markets are complacent against a macroeconomic backdrop that should perhaps be leading to more caution.
"The VIX index, also known as the fear gauge, has touched new lows" recently, said Keith Wade, London-based chief economist at Schroders PLC. "This is particularly surprising given the Fed has just raised rates for the second time this year and is also signaling another increase in September. This is even before considering China, the oil price and the rise of populism, which albeit seems to have waned in Europe for the moment."
The concern stretches across the Atlantic. "Markets are strangely complacent given the number of potential pivots facing the world and the fact that there is empirically a great deal of uncertainty in the world," said Eric Lascelles, chief economist at RBC Global Asset Management Inc. in Toronto. "This can be quantified via higher-than-normal policy uncertainty indices, as an example. The disconnect is not ideal."
Some managers also raised concerns over complacency in credit markets.
"We do think markets and investors are complacent in certain areas of the credit market like CCC-rated bonds or emerging market corporate bonds," said Victor Verberk, Rotterdam, Netherlands-based co-head of Robeco's credit team. "Investors have been taking on more risk, which is also illustrated by the huge flows into credits over the last years, often from tourist investors," described by Mr. Verberk as investors moving outside their core regions and mandates in the search for yield.
"Low rates have pushed these investors into higher yielding, risky assets" and credit valuations "have become more expensive and are no longer pricing in fundamentals at a time when the credit cycle is quite advanced and global imbalances are growing," he said.
But others are not so sure there is much complacency.