Close Look - Volatility can offer opportunity

Volatility can offer opportunity

Since the start of the year markets have seen increased volatility. Most notably, the US stock market has seen a correction from the highs recorded over the last two years, in large part caused by the dominance of the Magnificent 7 technology names. While an investor might understandably want to shy away from the markets during these times, volatility can actually create attractive buying opportunities. 

Embracing volatility - what is it?

Volatility measures how far an asset’s returns differ from its expected or historic value. It is usually associated with market indices or stocks. 

What has caused the recent bout of volatility?

Financial markets are always reacting to various factors. The start of this year has been characterised by major uncertainty following policy announcements by the new US administration. In addition, the S&P 500 index has become historically expensive, with several stocks trading at high valuations. Investors have also started to question the outlook for big tech companies who have announced significant investment into AI (artificial intelligence), especially after the release of the cheap Chinese chatbot, DeepSeek. 

Opportunity emerges

With all eyes on the US-related selloffs, it can be easy to overlook emerging  opportunities elsewhere. European stocks have outperformed as investors sought out attractively valued high quality companies. And as attention moves away from the technology sector, we anticipate broader profit growth from other sectors in the US, such as healthcare and industrials. 

Over the years there have been many other events that have had large impacts on financial markets, from Black Wednesday in 1992 to the Covid pandemic in 2020. Despite these major events, the long-term trend for market performance has continued to be positive, as can be seen in the chart. 

Long-term asset class performance

Source: Morningstar, data 31 December 1989 to 31 May 2024. US dollars. Rebased to 100. Past performance does not predict future returns.
 

Our view

Volatility is an inevitable part of investing. Diversifying an investment portfolio between different asset classes, regions and sectors can help prepare investors for some of the adverse effects of choppy markets, but for long term regular investors, volatility can provide opportunities to enhance their returns.