global perspectives

Beneath the surface, dispersion and uncertainty loom

Beneath the surface, dispersion and uncertainty loom
Alexis Maubourguet - 1798 ADAPT Lead Portfolio Manager

Alexis Maubourguet

1798 ADAPT Lead Portfolio Manager
Florian Ielpo - Head of Macro, Multi Asset

Florian Ielpo

Head of Macro, Multi Asset

In the latest instalment of Simply Put, where we make macro calls with a multi-asset perspective, we explain why current low levels of volatility underplay the true state of market uncertainty.  


Need to know

  • Markets have enjoyed a positive year, amid low realised volatility and minimal drawdowns.
  • However, beneath the surface there is an unusually large dispersion across sectors and stocks.
  • We believe this indicates high levels of market uncertainty and expect this dispersion to continue.
  • This hidden turbulence will continue to create opportunities and favour active over passive investment approaches.


As 2021 comes to a close, we can begin to draw some conclusions. Overall, market performance was positive (around 16% for MSCI World), volatility was low and growth prospects remain solid. While most investors were able to benefit from these supportive market conditions, underlying angst continues to hover over our heads as uncertainty remains despite the positive backdrop.

The volatility of returns offers one interpretation of market risk: that volatility tends to be negatively correlated to equity performance. Chart 1 represents the 30 days realised volatility of the S&P 500 Index since 2009. The levels observed in 2021 were well within historical averages, and the recent reading remains low (about 12%) even though greater risk aversion has been triggered by the Omicron variant. This suggests the market holds a higher sense of certainty for what is to come. However, this measure does not paint the whole picture, conveying just one of several messages: while earnings growth remained solid throughout 2021, other sources of risk have been stubbornly persistent.


Chart 1. Realised volatility (30 days) of the S&P 500 Index


Source: Bloomberg, LOIM.


Dispersion gains ground

Below the surface, the picture appears murkier. Chart 2, which looks at dispersion, represents the difference between the 30 days realised volatility of the S&P 500 Index and the average 30 days realised volatility of the top 60 stocks within this index (a similar computation using the whole investment universe shows comparable conclusions). Today, while overall index volatility has remained within historical averages, its dispersion has increased to levels above the historical average.

In our view, the market is experiencing a type of “windscreen wiper” effect, as every day/week/month brings about the unwinding of the previous day/week/month’s sector rotation. As uncertainty increases, investors are having trouble predicting which factor will benefit from the current conditions. The striking result shown on Chart 2 echoes the relative performance of value versus growth, financials versus healthcare or emerging markets versus developed market. Dispersion is not only found in this volatility measure, but also in the relative levels of performance.

The challenge of correctly deciphering the overall winners is a clear sign that uncertainty has increased.


The challenge of correctly deciphering the overall winners is a clear sign that uncertainty has increased. This is confirmed by the fact that dispersion has been gaining ground since 2019. In addition, this dispersion metric has recently sat at the 99th percentile (in the context of the last 12 years) – a sharp contrast to where index volatility sits today.  This reflects the dispersion seen within inflation subcomponents.

Recently, uncertainty has essentially been driven by the following three sources:

  • Covid-19, which initially sparked surprise followed by unpredictable patterns
  • Inflation worries
  • Evolving central bank policies.


Chart 2. Spread between the average realised volatility of the S&P 500 Index and its subcomponents


Source: Bloomberg, LOIM.


The lack of persistent momentum in the sector rotations seen this year suggests that the violence of these moves are less visible when only scanned through low-frequency and aggregated data. Higher-frequency indicators can paint a widely different picture, be it from a market or macro perspective and with higher granularity than usual (potentially beyond sectors and styles). The prevalence of uncertainty these days, for the investment world, makes this scrutiny essential: it has become necessary to fully understand the current macro-structure of the equity market in order to potentially benefit from it.


Simply put, investors should be looking beneath the surface to gauge today’s unusual level of market uncertainty.


important information.

For professional investor use only

This document is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393.
Lombard Odier Investment Managers (“LOIM”) is a trade name.
This document is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This material does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. This material contains the opinions of LOIM, as at the date of issue.
Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.
Source of the figures: Unless otherwise stated, figures are prepared by LOIM.
Although certain information has been obtained from public sources believed to be reliable, without independent verification, we cannot guarantee its accuracy or the completeness of all information available from public sources.
Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.
No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Asset Management (Europe) Limited prior consent. In the United Kingdom, this material is a marketing material and has been approved by Lombard Odier Asset Management (Europe) Limited  which is authorized and regulated by the FCA. ©2021 Lombard Odier IM. All rights reserved.