17 January 2019
Heightened market volatility would require investors to pursue portfolio diversification more than ever. Photo: Bloomberg
Heightened market volatility would require investors to pursue portfolio diversification more than ever. Photo: Bloomberg

How to win in a volatile market environment

Financial markets could be more volatile in the Year of the Monkey. Hence, investors are advised to diversify their investments. Here are some things worth bearing in mind.

As expected return from fixed-income products has declined, investors would rely more and more on return from equity investments. This calls for increased risk appetite.

Many central banks are adopting aggressive quantitative easing policies, leading to lower yields and higher prices of the bonds. However, fixed-income is still a crucial part of portfolios as it provides stability and better return than holding cash. For markets like Hong Kong, Singapore and Taiwan, where cash return is close to zero, it is especially the case.

If an investor pursues higher returns, he/she would naturally switch the focus to high-yield corporate bonds or emerging market bonds. A deep analysis and proactive management would help a lot in such investments at a time when the oil price has been falling and the leverage ratios of some emerging markets and high-yield corporate bond issuers are climbing.

Stock markets in emerging economies have been quite challenging in the past years. Strong dollar, weak commodity prices and poor corporate earnings have all had a negative impact on the markets.

We believe investor sentiment on emerging economies will improve when the dollar weakens, commodity prices bottom out and the Chinese economy stabilizes.

All these changes will take time. However, we still believe that emerging markets, especially Asian countries, can offer investors opportunities for good returns.

Diversified allocation is more important this year amid the expected volatility. Given a relatively high valuation of fixed-income products, we believe the equity markets in developed economies will provide better returns. Also, Treasuries can contribute, in terms of stability, to the portfolios.

Bonds and stocks tend to go in opposite directions. However, when there’s higher pressure in the market, it is likely bonds and stocks will show positive correlation temporarily. So investors should keep that in mind.

Overall, the situation of lower fixed-income return and sluggish emerging market equity performance will possibly last longer. The old way of investment diversification may become ineffective as the correlation between bond and stock prices is temporarily disrupted.

Overall, investors should adopt more flexible ways of asset allocation to deal with lower returns and higher volatility.

This article appeared in the Hong Kong Economic Journal on Feb. 15.

Translation by Myssie You

[Chinese version 中文版]

– Contact us at [email protected]


Managing Director, Chief Market Strategist, Asia, J.P. Morgan Asset Management

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