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Monday, November 1, 2010
Nothing out of the ordinary

“Last year saw a major positive correction to the local equity market after the turmoil we experienced domestically during 2008,” says Greg Flash of Alphen Asset Management. “During nine of the months of 2009 the ALSI posted positive returns. If you exclude January and February (as the tail-end of the correction), only June’s -3.1% return marred the rest of the year.”

He observes, however, that this year has seen a rather different landscape and, it would seem, a far more volatile one. “Five of the months so far this year have posted negative returns, with only February, March and July in the black - the latter two months giving close to +8% each. As at the end of August 2010, the year to date total return for the All Share Index has essentially been flat.
“The volatility of the ALSI this year may seem to be high, especially compared to last year, but how does it compare to the volatility of the market over the last twenty years?”
In the graph, we show the return of the ALSI (log scale, left hand axis), compared to the monthly returns (right hand axis), rolling six month volatility (right hand axis) and long term (average) volatility (right hand axis) for the last 20 years.
As can be seen, the rolling six-month volatility did drop down to almost 10% at the beginning of this year. Since then it has steadily moved up and currently sits at just over 20%. This is also the long-term average for the last twenty years. “Therefore, the market’s movement is not really out of the ordinary at all, especially when compared to the 1998 crash or even the credit crisis of 2008.”
As ever, we caution against a focus on the short-term numbers, he notes, particularly when dealing with an asset class as historically volatile as SA equities. You can be wrong both ways.

Copyright © Insurance Times and Investments® Vol:23.11 1st November, 2010
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