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Make volatility work for your investments

By Gofran Chowdhury

Markets perform well when the key indicators behind economic growth are strong and there is visibility ahead on how those indicators can be expected to perform. If global or local events create enough chaos, and investors can no longer look ahead and price-in market risk, that’s when things can get a bit scary.

And that’s where we are now.

Since the start of the year Australia’s economy has been hammered by a series of events, including horrific bushfires, the spread of the COVID-19 virus and a resumption of falling interest rates to try and stimulate a sluggish economy suffering from a lack of consumer spending.

The risk of Australia going into recession is now a secondary consideration. The focus is on keeping businesses running or in a state of dormancy where they can return to operational status rapidly once the virus has been contained. A huge spike in the unemployment rate cannot be prevented but if businesses can be restarted it will also drop rapidly.

Even before the virus we had been caught up in a series of global and unpredictable events that had forced central banks to push interest rates low to stimulate activity - and   for which we have adopted the term VUCA (volatility, uncertainty, complexity and ambiguity).

A turning point had been on the horizon and in December last year markets had been expecting rates to rise. Weeks later the US Federal Reserve cut rates by 0.5 per cent and its interest rate target is now between zero to 0.25 per cent. COVID-19 is another VUCA event, and its impact has been dramatic.

Australia followed America into a downward cycle, and our cash rate is now down to just 0.25 per cent.

What does this mean for my portfolio?

The message may not have sunk in fully yet but it is loud and clear. You cannot predict events like the global financial crisis, COVID-19, Brexit or Russia erupting into an oil production war with Saudi Arabia. But your portfolio will have to be prepared for such events.

You also cannot predict how long such events will impact markets. Coronavirus will remain an issue for months, not weeks. It was the same with trade wars, something that initially seemed a matter for diplomacy to resolve continued to escalate throughout last year with rising market impacts.

For now, that’s yesterday’s news as Coronavirus dominates the news cycle and fears of global recession rise.

The shockwaves from those fears created another ‘Black Monday’ on March 9 as share market indices across the world had the biggest one day fall since the onset of the global financial crisis in 2008. The Australian market shed over $100 billion in value.

Not surprisingly, the following day there was a market bounce in the US as investors scrambled to take advantage of what were perceived to be low share prices.

The investors selling into the market were panicking, which is never a good time to make investment decisions.

But were the people buying making a better decision?

The answer is maybe, and only time will tell. However, the ASX200 has dropped by 30 per cent from its peak on February 20.

We can say the buyers were not correctly timing the market, they were responding to one event and frankly, it’s a trade carrying substantial risk.

The lessons are:

  • Don’t try and time the market.
  • Volatility is the new norm.


When investors consider how they want their portfolio to perform they don’t just think about returns. A major consideration is the ability to be able to withstand unexpected impacts. We have seen ample examples of market moving events over the past decade and each has one thing in common – unpredictability.

Over the long term markets continue to rise – but it’s been a bumpy ride


What Trends have we seen?

At Citi, we have noticed an increase in clients wanting to lock in returns and reduce risk.

The latter is in recognition that VUCA is the new norm for investors. Gone are calm and predictable market conditions.

VUCA is driving a renewed focus on income options like corporate bonds and tailored solutions, and also how foreign exchange can provide a hedge and boost to portfolios.

At Citi we have seen a 208 per cent increase in bond transactions year on year and for February we had a 121 per cent increase in tailored investments. For the latter we are seeing investors reducing their exposure to direct cash and equities and investing in instruments that allow individual shares to drop between 30-40 per cent without any impact to their capital and return.

What should you do?

  1. Stress test your portfolio regularly to understand how it performs during market uncertainty.
  2. Ensure the income from your investments is sufficient for your needs in a low interest environment over the long term.
  3. Diversify smartly by combining asset allocation with instruments which can earn a positive return, even if the market drops 20 per cent.
  4. Consider buying another currency for diversification and to offset weakness in the Australian dollar

Gofran is head of investment specialists at Citi


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