Date
27 March 2017
To avoid excessive volatility, it’s better to include stocks in developed markets in your portfolio rather than holding solely mainland and Hong Kong stocks. Photo: Reuters
To avoid excessive volatility, it’s better to include stocks in developed markets in your portfolio rather than holding solely mainland and Hong Kong stocks. Photo: Reuters

Diversify to spread risks amid market volatility

Global stock markets provided flat returns with high volatility in the first quarter. In mid-February, they fell 10 percent from their levels at the end of last year.

No matter whether you have a longterm or shortterm investment horizon, the key is to diversify your portfolio.

While ups and downs in the markets are regarded as good opportunities for speculators, investors may emphasize more the fundamentals, technical factors and capital flows to better manage risk.

In the first quarter, US stock markets led mature global markets with a 0.8 percent gain, while European markets fell 2.5 percent and the Japanese market declined 6.5 percent.

Emerging markets rose 5.7 percent overall during the period. However China’s markets slid 4.8 percent, and Hong Kong’s fell 5.3 percent.

While their performances diverged, higher volatility was seen across the markets.

For example, the standard deviation of US stock prices was 14.8 percent in the previous year, higher than the 11.4 percent three-year standard deviation and 12.3 percent over five years.

Given the uncertainties in the pace of the US Federal Reserve’s interest rate hikes, commodity prices and the outlook for the global economy, the markets will continue to be volatile.

Investors should keep this in mind and diversify their investments.

From the aspect of capital flows, the market is turning more conservative, resulting in a trend of outflows from the stock market.

In Hong Kong, stock mutual funds recorded huge inflows in the first half of last year; then in the four months to December, they recorded consecutive net outflows, representing a falling appetite for risk.

Figures from the Hong Kong Monetary Authority show there’s ample liquidity in the interbank market. It means the money is staying in Hong Kong.

The aggregate balance rose to HK$390 billion (US$50.3 billion) by the end of last year from only HK$240 billion at the beginning of the year. The amount was HK$360 billion last month.

Once negative concerns are removed, this purchasing power will support the market.

Comparing different markets, the standard deviation of the one-year return from the mainland stock markets is 32.4 percent, much higher than the 14.8 percent for US stocks and 16.6 percent for European stocks.

So, to avoid excessive volatility, it’s better to include stocks in developed markets in your portfolio rather than holding solely mainland and Hong Kong stocks.

This article appeared in the Hong Kong Economic Journal on April 29.

Translation by Myssie You

[Chinese version 中文版]

– Contact us at [email protected]

MY/DY/FL

Head of wealth development for Hong Kong, HSBC

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