First off, a reminder to attend my next virtual event which promises to be a real gem! Put simply, Beyond Beta Europe Digital is probably the best digital event about factor investing this year. More details below.
When: 23 – 24 September
The recent coronavirus turmoil gave a fascinating insight into the way different factors behave during periods of market stress. Academically proven factors such as low volatility offered investors unique ways to either exploit alpha and reduce risk through rules-based, systematic strategies.
The heightened volatility has done little to affect investor appetite for smart beta which recently surpassed the $1trn assets mark. Studying how factors performed during this period will be a constant theme throughout the event while there will also be a deep dive into the product innovation taking place in the space.
ESG also came through coronavirus with flying colours as investors continued to pile into sustainable ETFs despite almost all other areas of the market seeing outflows. Why this was and whether there is anything stopping the green revolution will also be analysed.
This digital event will bring together some of the brightest minds from across the quantitative investing landscape to explore a whole range of areas within the smart beta, factor and ESG investing ecosystem.
The likes of Rob Arnott, Elroy Dimson and Société Générale’s Andrew Lapthorne will be speaking so this is not one to miss!
Property carnage and the strange VIX correlation
A great snapshot number is out today from private wealth law firm Boodle Hatfield on the carnage in the property and REIT sector. They report that “UK listed property companies collected 67% or approximately £730m of the £1.1bn in rent they were due in the last quarter (June)…by contrast alternative property classes such as healthcare, social care, logistics and student housing saw the best results for landlords, with over 90% of rents due being collected.” These numbers are fairly horrendous for mainstream REITs though not quite as bad as other research which suggests that the overall percentage of rents collected in the last quarter was as low as 20%. For example, Hammerson, which is focused on retail, collected only 16% of its rent roll for the last quarterly period.
“Boodle Hatfield says the next quarterly rent instalment, due on 29 September, is likely to see many businesses still unable to pay their rent, especially those in the retail and leisure industry, who are desperately attempting to catch up on sales which they lost out on during lockdown”.
Given the current drum roll for more restrictive lockdown measures over the next four weeks, I wouldn’t be too hopeful that this quarter is going to be any better. More pain ahead.
Talking of pain, I have been mightily confused in recent weeks that the classic measure of stockmarket pain – volatility – has been moving in roughly the same direction as US stocks. Up.
This is slightly peculiar. In most ordinary times – that is more than 95% of the time – when stockmarkets move up steadily, as they have been doing, the classic fear gauge measure, the Vix moves down. Put simply if equity investors are confident enough to keep bidding up share prices that would tend to suggest they are not fearful of market turbulence.
But as the chart below from analysts at DWS shows, in recent weeks the S&P 500 and the Vix have both been trending upwards. What on earth is going on ?
Here’s the take from DWS:
“ First, higher daily moves translated almost directly into higher option prices (and thus a higher Vix). Second, the demand for options increased from two sides: investors afraid to miss out on a rally tried to jump on the band wagon; and investors worried the rally was going too far too fast sought to protect their gains by buying put options. Higher demand for options means higher premiums, which means a higher Vix. There is also the potential for a self-enforcing upward spiral between the cash and options markets (while it is never clear what is the hen and what is the egg). The options market was certainly a significant driver in the recent U.S. stock-market rally.”
So, those naughty new wave of retail investors are at fault, again. According to DWS, what’s unusual this year is the amount of options traded on single names, above all the Tech heavyweights – trading volumes in some of these options having almost tripled compared to 2019.
If that is the case could we have an equally bizarre experience in the future where US equities start to steadily fall in price but the Vix also declines, powered in part by a situation where options trading falls off sharply alongside falling prices and steadily deflating share prices ? Declining Vix and declining S&P 500 ? Who;d have thought but the chart below suggests this is a distinct possibility……