Managing risk and taking advantage of current market opportunities

Since the last week in February, financial markets, like everything else it seems, have been gripped by the uncertainty surrounding the coronavirus and its potential impact on supply chains, global trade and growth.

Originally, expectations that the negative effects of COVID-19 would be temporary and localised, combined with new robust economic data, was enough to offset the initial economic risks associated with the virus. However, the market’s immunity was short-lived. The spread of the virus beyond China created fresh uncertainty for the global growth outlook and sparked volatility across financial markets.

As of the 20 March, the S&P 500 is down 26.7% year-to-date. This marks an official end to the unprecedented 11-year Bull Run, ushering in a new and uncertain financial chapter. With stocks around the world plummeting, oil tumbling and stress in credit markets deepening, where do we go from here?

Market outlook

Predicting the ultimate scale and impact of the outbreak is near impossible with question marks around the potential severity, scope and longevity still hanging over markets. As well as the tragic loss of life, the virus now poses a substantial threat to global growth. The original supply-side contraction saw factory shutdowns imposed in an attempt to contain the virus, depriving companies elsewhere of the materials they need for their own business, ultimately weighing on global supply.

Demand contraction has also emerged as worried consumers are reluctant to shop, travel and eat out because of contagion fears. As this twin supply-demand shock unfolds, the spotlight is now firmly focused on the co-ordinated response from both governments and central banks worldwide. Large scale monetary and fiscal stimulus has already been announced, whether or not this will be enough to curtail the market decline and restore investor confidence remains unclear.

How to manage risk

Market corrections can be hard to stomach, so here are some portfolio construction tips that will help you navigate choppy financial conditions in the future without feeling the need to jump ship.

One size does not fit all: Not with clothes, shoes or investment advice, so take the time to understand your risk tolerances, goals and time horizon to find a portfolio allocation that you are comfortable with regardless of the shorter-term financial conditions.

Don’t put all your eggs in one basket: The benefits of diversification have been well documented and were highlighted once again in recent weeks as Treasury values rose sharply amid the equity market decline. Your goal when diversifying is to lower the risk profile of your portfolio by adding non-correlated or inversely correlated investment strategies. This combination of assets that move independently of each other will allow for a more consistent and predictable return irrespective of the current investment climate.

Don’t try to time the market: It is impossible to pinpoint exactly when the market will turn and those telling you otherwise are likely trying to justify their nosebleed salaries. Instead, make asset allocations decisions that stand the test of time and tweak your portfolio to take advantage of opportunities as they present themselves. This is far more sustainable than the standard panacea of trying to “buy low, sell high”.

Opportunities in the current market

With volatility rife across equity markets and yields across safe-haven assets bound for zero, you would not be remiss in thinking that maybe it is time to start hoarding your money under your mattress in wait for a sunnier investment climate.

Whilst there is safety in holding cash, the question remains, why accept the negative real returns offered by cash when there is still an abundance of opportunities in the market?

Alternative investments represent one such opportunity. With little to no correlation to the stock market, specific alternative investments can remain unaffected by economic, political and social instability, adding a much-needed layer of diversification to your portfolio while simultaneously offering a higher risk-adjusted return.

At Holdun, we recognised some time ago that traditional asset classes alone were unlikely to deliver acceptable returns in periods of sustained low-interest rates and muted economic growth. As a result, we created our Alternative Funds. These include private equity, real estate, and venture capital funds, offering a broad range of exposure across the risk and illiquidity spectrum and little to no correlation to stocks, providing greater portfolio diversification, reduced portfolio volatility, and higher returns.

Ultimately, visibility is key and as long as the fog of uncertainty brought on by the COVID-19 virus persists, equity markets will remain in choppy waters and treasuries will remain well-bid despite their low-yield offering. At Holdun, our uncorrelated alternative investment funds offer shelter from the oscillation of the volatile equity market without sacrificing your upside return potential.

This article was produced by Holdun Family Office (Cayman).

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