Market swings get more aggressive

Singapore

WILD swings have made cameo appearances from time to time in the local stock market but these days they seem to be gunning for a regular starring role.

By several measures, volatility in Singapore equities has surged ever since China's yuan devaluation in mid-August, bringing with it extra business for stockbrokers and a spot of good hunting for those on the lookout for a bargain.

Analysts say the local bourse is likely taking its cues from markets such as China and the US, where the VIX fear gauge (a popular measure of market volatility) has spiked to historic highs over the past few weeks. However, opinion is split on how the dust will eventually settle.

Some analysts think the market will soon return to a steady state, while others believe it may have entered a new phase of relatively elevated volatility compared to the placidness of 2014, given external factors such as a looming interest rate hike in the world's largest economy and a slowdown in the second-biggest one.

Up until a month ago, the norm for the benchmark Straits Times Index (STI) was to post mild daily moves of less than one per cent in either direction. That has changed in recent weeks, with the index beginning to cover more ground each session.

Out of the 172 trading sessions for the Singapore Exchange (SGX) so far this year, starting Jan 2, there were only 28 sessions - or about one in six - where the STI's daily percentage change was at least one per cent, going by data compiled by The Business Times. Tellingly, the brief period between Aug 11 and Sept 10 disproportionately accounted for half of these 28 unusual sessions. Aug 11 was the day of China's first yuan devaluation.

Other numerical indicators paint a similar picture. A weekly sum of absolute STI percentage changes climbed to 9.2 percentage points for the week of Aug 24-28, the highest since the first week of October 2011. The daily average percentage change in the STI over Aug 24-28 came in at 1.84 per cent, also rather large by the index's usual standards.

Kelvin Tay, regional chief investment officer for Southern Asia Pacific at UBS Wealth Management, said there was a "discernible increase" in STI volatility since the yuan devaluation. "In the days following the depreciation, China also released a set of rather poor manufacturing data (Caixin PMI) which spooked the market. It was therefore not surprising that the STI saw heightened volatility since that period," he said.

"For example, the raw beta of the STI from the beginning of the year to just before the yuan devaluation was 0.18, but this jumped to 0.43 (in the period) from Aug 11 till now, based on Bloomberg data. Technically, raw beta is obtained from the linear regression of the STI's historical data to the S&P 500."

That increase in "raw beta" indicates the STI has become more correlated with the S&P 500, which has got its own shot of caffeine. The VIX, a volatility gauge based on S&P 500 options, roughly tripled to 40.74 on Aug 24, its highest since October 2011.

The heightened fluctuations in the local stock market have led to more trading activity, a boon for remisiers.

Raymond Chee, managing director of OCBC Securities, said its customers' average daily trading value for August was 46 per cent higher than July's. A large part of that jump came from Aug 11-13.

During those three days, the average daily trading value for SGX-listed stocks was 25 per cent above the average figure for the whole of August, he added. "While the market volatility has triggered selling from many investors, it has also presented an opportunity for investors with a longer-term horizon to enter the market to take advantage of cheaper valuations at this time."

Analysts say the market may eventually settle down after a few months, though volatility levels could remain higher than they were last year.

"The next few months are likely to remain rough for shares as September and October are often tough months and the worries about China and the Fed are likely to linger for a while," said AMP Capital economist Shane Oliver in a Sept 5 note.

Barclays said in a Sept 8 report that it expected an "eventual decline in volatility from extreme levels", which could bode well for equities, though it did not specify when.

Other market watchers pointed out that the local market's mutedness in recent years could have been an anomaly in the first place.

"It is not that the higher volatility is the new normal, it is simply the old normal. Volatility was abnormally low in 2014," said Bryan Goh, chief investment officer of wealth manager Bordier. "We have had long periods of low volatility punctuated by instances of financial crisis, notably in 1997 and 2008. Even if we discount these extraordinary periods we can see that volatility was at the low end of its historical range. In other words, markets were too complacent."

That means the recent spike in volatility could simply mark a gradual return to historical norms, he added. "Volatility has now recovered somewhat but it is still low relative to its historical range. I expect volatility to fall from the current levels but not to return to the levels seen in 2014."