- Analysts at the firm point to a possible strategy to invest in historically low valuations such as emerging markets, Italian equities, especially the financial sector, and the Japanese.
- Another possible strategy would be the sale of assets that have a positive correlation with volatility.
- In general terms, from WisdomTree argue that volatility has increased.
By Funds Society, MadridGlobal markets, with the leading US equities, have performed quite well since the global financial crisis of 2008 and 2009. According to WisdomTree analysts, as it begins 2019, investors are beginning to think what would happen if The next recession is already taking shape, keeping in mind that the United States is going through, quite possibly, the most prolonged economic expansion since the period of World War II.
According to his analysis, the volatility variables indicate a higher level of general risk in relation to the beginning of 2017 or 2018. “In such environments, we believe that investors could be thinking of adopting portfolio strategies in a more defensive manner. Likewise, there could still be a good reason to maintain exposure to risk assets, since end-of-cycle increases can and do occur. Anyway, now it would be better to mitigate the risk to the downside, “they say.
From WisdomTree, four strategies are aimed at mitigating the risk of loss of significant value of a portfolio in phases of bear markets. “Unfortunately, they do not always work to the same degree and nothing ensures that they do so in every market decline. Anyway, it’s still important to have them in mind, “the analysts say.
- Strategy 1: find historically low valuations. According to the analysts of the firm, when investors find valuations that are close to historical lows, it means that there is an important indication that many of the risks that the holders are taking, may have already been discounted. “This strategy is usually associated with the term: counter-trend approach. The possible markets to be considered for a strategy of this kind are: emerging markets, Italian equities-above all, its financial sector- and the Japanese one “, they point out.
- Strategy 2: find values that offer high dividends.One aspect of this strategy -stated from WisdomTree- is that it considers that in equities there is always the dividend component and the price component in the calculation of a certain total return. As explained, the dividend component, in the worst case can be zero, that is, when there are no dividends. The price component, on the other hand, can clearly be positive, null or negative. In a strategy based on higher yield values, the generation of total return is more oriented towards dividends and less towards prices. Given that the dividend component is less volatile, there is a way to reduce the risk of an equity strategy. “The other aspect to consider refers to the fact that the higher yield values tend to be found in sectors more oriented to the defensive area, such as public utility companies. The trend of exposure to these sectors may be another potential route through which the total risk of an equity strategy can be reduced. The possible markets to be considered for a strategy of this kind are: emerging equities, from Europe and the US, “he says.
- Strategy 3: sale of assets that have a positive correlation with volatility. “Record prices and high relative valuations tend to make investors more concerned about the risks of falling. In our opinion, this concern is a critical factor when considering a puts strategy. The possible market to consider for this strategy is: US equities “, point out the analysts of the firm.
- Strategy 4: not to forget the classic “refuge assets”. Finally, from WisdomTree they explain that in each of the first three strategies an approach is applied to reduce the risk to a certain exposure, either to equity directly or to an asset with a high correlation with it. “We recognize that as volatility increases, maintaining exposure to equities may be a less favorable option depending on whether or not any risk reduction mode is used within the approach. Should volatility increase due to the perceived geopolitical risk, gold may be worth bearing in mind, “he explains. For them, another option may be exposure to certain currency markets such as the US dollar or the yen, which have tended to appreciate in times of increased volatility.