More volatility in 2025

Expect more swings across stock markets in 2025 on the back of geopolitical tensions and uncertainties surrounding US president-elect Donald Trump’s tax and tariff policies, Bloomberg cites strategists at Bank of America, JPMorgan Chase, and Spain’s Banco Bilbao Vizcaya Argentaria (BBVA) as saying. JPMorgan sees the Cboe Volatility Index (VIX) averaging around 16, slightly higher than 15.5 across 2024 — still, it believes macro indicators suggest volatility will be higher, with data pointing to a VIX level of around 19 on average.

Markets could see long bouts of calm interrupted by “fat tails” — extreme market swings — with BofA forecasting a fivefold increase in market fragility shocks in the S&P 500 Index compared to the past 80 years, with a major index shock likely on the cards.

That trend has already started: “The magnitude of fragility shocks in the largest S&P stocks reached 30+ year extremes in 2024 with few signs of dissipating if the AI boom continues,” BofA strategists including Benjamin Bowler wrote.

Volatility will likely be concentrated in the first half of the year: “We could go straight into a relatively elevated equity volatility environment in the first half of next year,” UBS Group’s head of US equity-derivatives research, Max Grinacoff said. Certainty around Trump’s policy direction later in the year could later lower bond volatility, according to UBS.

But some expect volatility to last through to 2026: Societe Generale SA strategists forecast rising volatility through 2025 and 2026, recommending buying the dips in volatility.

Helping suppress volatility in the market: Quantitative selling strategies such as zero-day to-expiry options by banks and EFTs to exploit returns are pushing investors towards long gamma trading — meaning that dealers are making moves against the prevailing market action to hedge their risks, thereby suppressing volatility. Volatility selling is steady in the US and Europe, while in Asia, the demand for volatility is expected to rise, especially in China and Hong Kong, driven by economic pressures and stimulus measures.

Heightened volatility makes an “active investment approach, diversification, and strong risk management” essential, Goldman Sachs also said in its Asset Management 2025 Outlook report (pdf). The investment bank believes that investment-grade bonds are an ideal option in 2025, as rate cuts continue — albeit at different timelines. The investment bank also sees opportunity in US stocks and in emerging markets.

It also recommends investing in small-cap stocks to benefit from their large valuation discounts. Smaller companies are expected to be more resilient in light of tariffs in comparison to their larger peers, due to larger domestic revenue sources and shorter supply chains, the report says.

MARKETS THIS MORNING-

Asian markets are mixed once again as traders await the Fed’s interest rate decision this week, with Japan’s Nikkei and Topix both up and South Korea’s Kospi and Hong Kong’s Hang Seng down. Over on Wall Street, futures point to a lower open, after the Dow Jones fell yesterday to log its longest losing streak since 2018.

THE CLOSING BELL-

The DFM rose 4.5% yesterday on turnover of AED 1.2 bn. The index is up 24.3% YTD.

In the green: Dubai Financial Market (+14.7%), Emaar Properties (+14.7%) and Emaar Development (+14.6%).

In the red: Takaful Emarat (-9.8%), United Foods Company (-9.6%) and Agility (-7.0%).

Over on the ADX, the index closed up 0.2% on turnover of AED 1.1 bn. Meanwhile Nasdaq Dubai rose 3.9%.

CORPORATE ACTIONS-

Equitativa, the manager of Emirates REIT, issued a new senior secured sukuk valued at USD 205 mn, according to a bourse disclosure. The proceeds from the sukuk will be used to fully redeem an outstanding amount of USD 199.7 mn from the previous USD 380 mn secured sukuk certificates issued in December 2022.

The details: The new sukuk is listed on the International Stock Exchange and carries a profit rate of 7.5% for the first three years, increasing to 8.25% in the fourth year.

Remember: Equitativa redeemed USD 105 mn of the trust’s USD 380 mn sukuk certificates in October as well as USD 19.3 mn of Emirates REIT’s USD 380 mn sukuk certificates in August after selling the Trident Grand Mall. It had also redeemed USD 56 mn of the sukuk in March 2023.