Most markets are near record highs, point at which more volatility is to be expected. This is exacerbated by many events in world politics. I will highlight three here:
The UK may struggle to find an amicable exit from the EU, pointing towards a prolonged, business friendly transition period, which has send the FTSE to record highs. The only problem is that a prolonged, close relationship with the EU will not be acceptable to hardcore Brexiteers, which risks leading to new elections, likely to be either inconclusive or ending with an old Trotskyist taking the keys to number 10 Downing Street. The Brexit negotiations outcome is still unpredictable, with only weeks left to find an agreement on the divorce. Thereby the EU’s third largest economy holds a lot of potential for volatility in the UK and wider markets.
USA and Donald Trump
Surveys give the Democrats a ⅔ chance to take a majority in both houses at the upcoming mid-term elections in the USA. As this will increase the pressure to impeach Donald Trump with all the mud sliding that goes with it, the compulsive tweeting POTUS45 holds a lot of potential for volatility in the USA, which still sets the pace for global markets. As a side note, one has to wonder how to control that his family and friends are not benefiting from advanced knowledge about tweets which move markets?
At the same time, an increasingly protectionist, inward looking US is retracting from Africa and the Middle East. Having gained greater independence in its energy supply, the USA is for the first time in decades in a position to fight trade wars and to strategically withdraw from oil supplying countries. These regions won’t fall into a vacuum, as Iran, Russia and China are all keen to replace American influence. For better or worse, this will change energy markets and investment markets dramatically.
The European Union and the common currency have made great progress since the real estate bubble burst and caused the last global financial crisis. The “PIGS” economies of Portugal, Ireland, Greece and Spain (though currently under the threat of a no-confidence vote) are growing, unemployment had been reduced, public finances are in better shape and so are most European banks. Except for Italy, where little has been achieved so far, and populists promising a guaranteed income are forming a coalition government with separatists demanding a flat rate income tax of only 15%. Much of the press is relating Italy’s economic woes to the Euro and some populist elements in Italy are playing with fire when toying with introducing a soft Lira. Brussels and Frankfurt will exert pressure on Rome making great headlines and sending the Euro and European markets occasionally lower.
How to make money in volatile markets
Where investing and waiting is a simple valid, profitable strategy in bull markets, volatility requires a more active and informed approach.
Some of the traditional instruments used in volatile times are gold and Volatility Futures. I am no fan of them. Commodities are not productive and investing in them is only driven by speculation, with gold having had a poor performance over the past five years. I find Volatility Futures hard to handle and it is tough to find the right entry point. I prefer shortening particular stocks and indexes when the signs are right. I also hold cash in orders to take advantage of extreme swings in stocks which I consider sound companies with a great future or sell positions in stocks where I see trouble ahead (eg Deutsche Bank or some UK retailers).
As a side note I would like to highlight the positive development of our unleveraged buy positions in eToro’s OutSmartNSDQ fund and GW Pharmaceuticals plc have developed well.