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Volatility is a measure of the change in price of a given asset or investment. An asset with high levels of volatility, such as Bitcoin, will have large and regular changes in price. To give an example, the state pension allowance (although obviously not a security) has a very low level of volatility because it only changes once a year and it stays constant for that year.
Volatility isn’t necessarily a bad thing. For investors who are geared up for it, such as high frequency trading hedge funds, volatility represents an opportunity to profit from the movement in the price of an asset.
But for investors who are investing more passively, and who are looking to derive steady income or growth over the long term, towards fixed investment objectives, volatility can represent uncertainty and risk.
Investors have been used to low levels of volatility in financial markets for the last few years to the extent that many commentators have gone so far as to call investors complacent.
Volatility has been low partly because of what many analysts have called the Goldilocks market…strong corporate earnings and economic performance, low inflation and low interest rates. Specifically, because there has been such strong support from central banks and governments, most assets have trended steadily higher. For example, even the Brexit referendum didn’t jolt markets (except currencies) too much.
Most asset prices have been going up and at a steady pace – just like most investors like them. So good news all round…but as we’ve seen recently, all good things must come to an end, or at least when it comes to financial markets…good things must become a bit more volatile.
Recent US figures on jobs, wages, and inflation have led to fears that interest rate rises are coming sooner rather than later. Inflation is returning to the Eurozone, whilst the UK economy continues to show resilience, inflation remains stubborn, whilst labour markets are tightening globally.
These phenomena have led to investors’ complacency fleeing and resulted in profit taking and a fundamental reassessment of market risk, now that risk has returned – hence the reemergence of volatility.
The challenge is that not only has volatility remergered, it has returned to the highest level seen in years. This may well be great news for professionals, armed with bloomberg terminals, high frequency trading and research teams…but for everyone else this represents uncertainty today and tomorrow.
Market stability since c.2010 has largely been driven by market participants knowing they will be supported, come hell or high water (strong growth or strong employment), by central banks. Central banks made clear they were willing to use monetary policy to make sure no one lost money, regardless of how overvalued stocks become or how much debt there is in the system.
However…central banks have started to tire of their decade long fight against underemployment and, with inflation rearing its head, they now have price stability firmly in their sight.
Depending on just how animated central bankers become, this could mark the end of the bull market – in fact a number of high profile names, including Bill Goss, the so-called Bond King, have already called the end of the bull run.
Although inflation trends are just that, trends and not fate, evidence is mounting and indicators are coming in ahead of expectations. The economy is strengthening in all corners of the globe, as are labour markets. The oil price has doubled from its lows. Recent activity represents the final recognition by central banks that whether it was anything to do with them or not, deflation worries have now all but disappeared.
It is this recognition that rising inflation will in turn mean rising interest rates and the with this inevitable policy intervention, the long feared return of volatility.
In light of this returning volatility, and with inflation stubbornly high, Goji believes a new alternative is needed. We believe that alternative is Direct Lending – an asset class that generates income from credit assets (ie loans) that are not directly impacted by changes in market sentiment or pricing like traditional fixed income products, such as Bonds.
Put simply, Direct Lending is old-fashioned lending, just without the bank. As tougher regulations have changed the post-financial crisis landscape, traditional banks have become more cautious and have cut back on business lending. That’s created an opportunity for a growing and innovative group of new lenders who are offering loans to credit worthy small and mid-size companies, property and government borrowers. It’s a dynamic and growing sector, and Goji are happy to support growing UK businesses.
Over 160,000 retail investors have already invested in this asset class. Some of the UK’s most high profile investors have also invested in the sector, including Neil Woodford, Blackrock, L&G and Aviva.
Goji is a specialist investment platform that offers advisers and investor access to the sector through a number of tax wrappers. Goji’s Direct Lending Bonds help investors to benefit from the sector whilst helping to manage the risks. Goji’s Diversified Lending Bonds diversify investors across a number of lending partners and thousands of loans helping to finance creditworthy UK companies. Goji’s Renewables Lending Bonds finance a number of UK renewable energy projects enabling investors to earn a return with a real impact on the UK’s energy security and emissions targets.
We aim to generate attractive returns whilst preserving capital by partnering with what we consider to be the very best UK Direct Lending platforms.