Crystal Wealth Newsroom

Investment in a volatile world


It’s arguable whether there are more threats to global economic stability today than in the past, or the 24/7 news coverage just makes it seem so, but nevertheless, there are a number of key issues fuelling current market instability and short-term ‘noise’.

We’re all well aware of the ongoing drama around Brexit and now the increased uncertainty of a ‘no deal’ Brexit through Boris Johnson. The ongoing trade war between the US and China continues to drag on global growth, while both parties continue to assess their strategic options and need for some type of resolution.

We’ve got the risk of increased confrontation again in the Middle East, heightened by the recent drone attack on oil facilities in Saudi Arabia. And we’ve got US domestic political risks with the 2020 election process starting to gather momentum.

Closer to home, we’ve had slowing house prices, although the price decline appears to be flattening out now in some areas, and reduced economic growth but the first balanced budget in over a decade.

The simple observation is that they’re all valid risks, and we expect there to be far more volatility in all markets as sentiment moves around in response to the latest ‘update’. Therefore, where and how you invest and the returns (relative to the risk) that you’re going to get from that investment need to be considered quite carefully.

While it is natural (and healthy) for you to question your investments – and even whether you should be invested at all on an ongoing basis – remember that this is also the nature of investment markets. They thrive on worries which in many cases never come to pass and hence the focus needs to remain on the longer-term outlook.

The global impact on your investments
Of course, it’s difficult to predict what will happen and the perennial question remains about the possibility of recession here and abroad and what the trigger point could be. However, economic growth is still present (albeit slower) and, globally, central banks are focused on stimulus and easier monetary policy to support this backdrop.

To help your investments cope with the ongoing turbulence, we structure investment portfolios to deal with different scenarios or ‘market outlooks’.

Underpinning this is the discipline of a well-diversified portfolio, of course, but this type of situation also heightens the need to look at the different types of assets used within sectors. Assets that will respond well if the outlook weakens, and others assets that may do better if the rate of growth stays the same or in fact picks up (e.g. through a trade war resolution of some sort).

First and foremost, we’re always looking at the medium to longer-term fundamentals as we evaluate possible investment sectors – not the short term. If we can use the volatility to our advantage to get better prices to buy or sell assets, then that’s a tactical decision and we will position accordingly.

Fundamentally, we’re trying to design portfolios to deal with multiple scenarios because the probability of this exists all the time. We’ll always have economic risk; we’ll always have geopolitical risk to work through.

Delving deeper into diversification
When we talk about diversification, however, it’s not in the simplistic sense of saying, “Well, we’ll have so much in bonds, so much in term deposits, so much in shares and so much in property, etc.”

We need to look at the different types of assets that will respond well if things weaken and what may do better if the underlying growth rate picks up. For example, if we have a little bit more inflation (or more importantly expected inflation) we may still have low rates, but you won’t have as low rates as we have now. That’s the key. That’s the sort of scenario we still need to build portfolios around, not just a recessionary outlook, hence the role assets such as gold can play.

Time to play it safe?
One of the challenges at present, with the increasingly uncertain outlook, is the bias towards loading up on defensive, very conservative assets given the collapse in global interest rates. Unfortunately, we believe this approach is not likely to work very well in meeting many portfolio ongoing cash flow requirements as the returns just won’t be there.

That poses several challenges.

It means, as an individual, you have to be very analytical about your spending needs, your appetite and ability for future work, and your appetite for risk. Can you accept a bit more asset price volatility as long as you’ve got a good income flow? Can you think about alternative strategies such as increased exposure to other asset types such as property or mortgage-backed funds?

For us, it means we’ve got to get far more detailed in that analysis and discussion with you about your goals, your objectives, and what you’re trying to achieve.

Expectations have to be realigned, too. We’re in a different inflation and interest rate environment, and we do expect returns, which are all relative to those benchmarks, to be constrained moving forward as a result. For example, we don’t expect sovereign bonds to deliver high single-digit returns as in the last 12 months. Nor is it particularly sensible to be talking about 10%+ returns if interest rates are less than 1% and inflation can’t even meet central bank targets.

However, we do think that you can still get a solid income yield from a portfolio in this environment.

When interest rates were higher, you may have been able to deliver that solid income yield with lower capital and lower fluctuation in the value of your asset base. Now you can expect to experience some fluctuation in your capital base. And that’s a key difference to be aware of.

It may be taking on a bit more risk than you have in the past, but it doesn’t necessarily mean you’re loading up, or have to load up, with a huge amount of risk to get that 4-5% pa income yield. The key is to ensure the portfolio has sufficient short-medium term liquidity (i.e. ready access to funds) to deal with your cash flow needs and not be a forced seller if prices move the wrong way in the short-term.

Choosing investment wisely in a volatile world
As a consequence of this current uncertainty, there’s a reasonable amount of cash within markets still sitting on the sidelines that in the past would have gone into defensive asset classes.

Some people are sitting in cash because they think we’re going to have a recession – they are waiting for the market to collapse before buying in. But to date, it hasn’t played out that way and now the discrepancy between equity and fixed income yields has widened further.

You can put the funds in cash and earn less than 1%. Or in certain parts of the world earn zero or negative returns from government treasuries.

The reality is that the yield on equities, relative to the yield on bonds, is still very attractive on the premise that a reasonable level of corporate profits can be maintained.

So there are still reasons why it makes sense, despite the risks, despite the increased volatility, to still be invested in ‘growth’ assets.

You just need to do it sensibly, strategically, and in a well-diversified way and have a plan to deal with the different ‘scenario’ outcomes.

Ensure your investment portfolio is optimised in order to take into account global events. Speak to one of our team today by calling 02 8599 1790, or email

The above information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. We recommend that you obtain your own independent professional advice before making any decision in relation to your particular requirements or circumstances.

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