Recent events highlight investors’ need to diversify portfolios against potentially market-shaking risks
Given the carried-over momentum from last year’s epic rally in U.S. equities, along with gradually easing risks from Brexit and U.S. China trade tensions, investors have much to be bullish about. But as a new note from AGF Management observes, they should be mindful of how fickle late-cycle share prices can be — especially given recent developments of global significance.
“The first of these ‘grey swan’ events was the surprise U.S. air strike that killed Iranian General Qassem Soleimani at the beginning of the year,” said Kevin McCreadie, CEO and Chief Investment Officer at AGF Management.
Tensions ran high in the markets for several days following the attack, McCreadie noted, with high risk of a more dramatic pullback with a further escalation in tensions. In the end, however, the two nations managed to avoid a full-blown war.
But a second swan emerged with the spread of a novel coronavirus originating from the Chinese province of Wuhan. The World Health Organization has declared it a global emergency, though it stopped short of calling it a pandemic. As of Tuesday, the number of cases recorded worldwide exceeded 20,000, with over 420 deaths.
“It has also spread to several other countries and parts of the world, including Europe, the U.S. and Canada, where four cases have been confirmed to date,” McCreadie noted.
The situation is expected to deteriorate before it gets better, prompting many investors to reduce their equity exposure, particularly in vulnerable areas such as Chinese and global airline stocks. McCreadie drew a parallel to the reaction following the early 2000s SARS outbreak, with further volatility to be expected as the current “hyped-up news cycle” stokes fears and influences people’s behaviour to an unprecedented degree.
“But that’s not a reason to panic,” he said. He acknowledged that a pandemic would likely exacerbate anemic conditions of economic growth and resuscitate recession fears, but cited the probability of a short-lived negative impact as global health officials express confidence that the virus can be contained.
He stressed the need for investors to thoughtfully balance the risk of a more significant downturn ahead with the prospect of another leg up in the markets. That includes a properly weighted portfolio of stocks and bonds given the situation, with possible added diversification to alternative asset classes and long-short strategies.
