There’s been much collective moaning and gnashing of teeth amongst investors over the last few, turbulent, weeks. The penny seems to have finally dropped that we are now entering a new volatility regime, where markets could trend sideways for aeons, or even slowly trend downwards interspersed by elongated bouts of peak panic. On balance though the consensus seems to be that the equity bull market has probably run its course, for now, although I still think we could see one last hurrah early next year.
Anyway, the key point is that we are probably simply ‘back to normal’ i.e markets won’t obviously trend in any direction. As evidence of this I’d cite a note out last week from DWS which reminded us that in 2018 market volatility was…..wait for it….about average for the long term.
DWS compared the number of S&P 500 declines of at least 3% with the average magnitude of the decline in each calendar year.
The chart below shows “that 2018 almost exactly matches history: in 2018, we saw six times a decline by more than 3% (average fall: 7%). Since 1990, declines of more than 3% occurred almost seven times a year (average fall: 5.9%). So from an average-volatility perspective, 2018 is just a normal stock-market year. Looking at the top left corner, 2017 was the big exception, when the S&P 500 did not drop by 3% or more even once. Dropping twice by some 10%, as the index has this year, might seem more exceptional. But it is not that uncommon, too, when looking back in history: at least two declines by 10% or more within one year have occurred seven times since 1990.”
If that is the case, don’t expect the big hedge funds to reap any super returns from elevated volatility. Vol levels are simply back to where they need to be – which means that speculators will still struggle to make much money.
One contributing factor underpinning this ‘increased’ market volatility has been the violent ups and downs of the price of oil. One moment, everyone thinks we could smash through the $100 a barrel mark, the next thing we’re all predicting another breach of $50. God alone knows what will happen next but one thing is becoming increasingly obvious – those of us expecting a sustained energy equities rally are about to be disappointed, again! I’ve long thought that the US shale revolution, for instance, would end up resulting in a massive increase in M & A activity. The good news is that I might be about to be proved right. The bad news is that the takeout prices on these equity deals are distinctly underwhelming.
That at least is the message hidden deep in the monthly report of specialist fund manager Westbeck and its energy fund. They’ve put together a fascinating table (below) which lists the increased rate of M&A activity in the US unconventional energy sector. For those of us heavily invested in this growth story, the message is grim – don’t expect any big paydays from these takeovers. According to Westbeck, they counted 11 deals above $1bn since the start of the year, with 10 listed companies.
“Most deals have so far involved a relatively small premium (20 to 30%) and a payment in stock with the share price of the acquirer typically coming under significant pressure. In other words, shareholders of the acquired company have not enjoyed the big payday one might have expected. And the reason is that most of these deals are defensive in nature. In other words, E&Ps are starting to realize that the FCF mantra imposed by the market is difficult to achieve without significant scale”.