Patrick Schotanus, global investment strategist at Kames Capital, agreed investors should consider the shape of the curve, including focusing on whether it is trending downwards or upwards.
He said while the VIX index was ultimately driven by investors’ sentiment towards the markets, its value tends to reflect fundamentals – in other words company earnings reports – which have been largely positive lately.
Schotanus added the VIX index tended to be unpredictable because it tended to be highly volatile itself.
“Volatility is more volatile than returns,” he said.
He agreed that volatility appeared to be “cheap” currently – in other words the VIX market could be underappreciating the levels of market volatility that lie ahead.
So the experts believe that volatility expectations are low, though not at the 2006-style levels implied by the VIX last week.
However, ultimately the VIX and other indicators only demonstrate the market consensus – and the consensus is far from always right.
Henderson’s de Bunsen said he was bearish, and believed the VIX and other indicators were showing “complacency” on the part of investors.
“The market seems to be going on thin air,” he said.
“Earnings are quite strong, but the [UK] GDP numbers we saw [last week] have been a little bit disappointing.”
He added that the withdrawal of quantitative easing in the US boded badly for markets, which were propped up by the policy for years after the crisis, and that EU policymakers might soon have to follow suit and end their QE policies.
“I have less equity exposure than I think I have ever had,” he added.
The VIX may be a broad indicator of consensus, then, but by no means does that mean investors should be complacent.
