Market volatility is rising, and is close to the levels reached in 1987 and 1998. That is the con...
Market volatility is rising, and is close to the levels reached in 1987 and 1998.
That is the conclusion drawn by recent Salomon Smith Barney research into the characteristics of the FTSE 100.
Using five-day moving averages, it has found that the number of stocks that move by 5% in either direction on a single trading day has fluctuated between 20 and 30 since February. On some days it has topped 40 stocks. The average figure for 1999 was 10.
According to Salomons, this is a near-historic high beaten only by 1987 and 1998 - years which saw equity levels fall 56% and 33% respectively from peak to trough. The difference is that, unlike the months leading up to the crash of 1987, the market is trading within a relatively tight range.
The group's UK equity research team thinks the swings in sentiment and sectors, fuelled in part by new-tech issues and a paucity of quality company research, means many managers are following the back rather than the fundamentals.
Graham Kitchen, head of the UK equity team at INVESCO, sees the volatility as a buying opportunity.
He adds: "We take the long term views of stocks. If anything, when a stock that we like has fallen, we have just been buying more of it. We are using it as an opportunity to add to the attractive stocks we are in."
Geoff Miller, fund manager at Exeter Asset Management, says that the volatility of the last quarter has seen increased trading as funds are more actively managed to take advantage of the extreme peaks and troughs in stock prices.
"Over the long term, the effects of these short-term movements will be nullified, but for managers that want to add value I believe they should be taking advantage of these short-term movements as well as making sure that they have the right long-term strategies," he says.
"The performance tables in six months' time will look very different from today's. The current volatility puts a big question mark out there for managers, and those who simply maintain a very heavily overweight tech position are going to find it increasingly difficult to perform relative to their peers."
Miller sees the volatility lasting for the first half of the year, at the end of which the overvalued tech stocks should be weeded out, leaving a more balanced, less volatile market.
He says: "We have seen a surge of tech, media and telecom stocks, and now we are seeing a process of definition between the real tech companies and those dot.coms that have been thriving on a wing and a prayer which will sink and disappear without trace.
"The second quarter will belong to the more selective tech stocks and growth stocks, and we are likely to see a more stable market place in the second half of the year."
According to Datastream the six most volatile stocks this year have all been tech, media or telecom stocks. BSkyB tops the list with its price having moved by more than 3% on 59% of trading days this year. Colt follows with 57% and then Marconi on 55%, BT on 53%, Vodafone AirTouch on 51% and Reuters on 51%.
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