Global markets were able to serve up a cascading of events in 2015 so far from the fall of oil price and euro, to rallying government bonds; from the removal of Swiss franc floor to the shocking election results in Greece. It appears as if European markets will be setting the mood for the global risk appetite.
Just last week, the European Central Bank chairman Mario Draghi announced a €1.1 trillion quantitative easing (QE) programme. pledging to purchase €60 billion worth of investment grade-rated securities each month from March this year until September of 2016. This new programme is big enough to bring about easing of financial conditions and to create substantial wealth effects by increasing asset price boost demand in the economy. However, due to the lag in monetary policy there isn’t much to be expected in seeing the bulk of the economic impact until 2016.

Continued support

From a shorter-term and more tactical perspective the ECB chairman’s announcement is the most recent confirmation that the Swiss National Bank’s decision to abandon the Swiss Franc cap will not indicate a broader shift among central banks to reverse their policies. As such, the underlying environment of such low prices of oil, low government yields and improving economic expansion in developed markets specifically, should therefore continue to provide support for global equities in general.
Although the market’s preliminary reaction to Draghi’s plans did provide minor boost, a sustained bout of the QE will persist to pressure the euro and also provide another tailwind for Eurozone equities. European growth may still be frail, but European firms will be enjoying more viable combinations of a highly competitive currency, falling energy prices and record low government bond yields.

Keeping and staying in control

The road ahead is unpredictable and slippery. The question then is how can investors safeguard themselves in this unpredictable climate and keep control of things? As recent events shown, maintaining a disciplined investment process is even more essential in this diverging world. Investors who want to keep warm will be required to stick to four basic principles.

First, they must be well-diversified holistically. Individual price moves have increased as census expectations have narrowed and policies continue to be diverse. For investors seeking to sidestep uncompensated volatility, it is imperative to avoid over-exposure to any individual asset, asset class or region. Investors should likewise consider diversifying into more options.

Secondly, rebalance is required regularly and periodically. A disciplined approach to rebalancing a portfolio toward a target allocation will let investors systematically, purchase dips and take on profits without falling into behavioural traps which most of the time result in even more professional investors buying too late or sell out at the bottom.

Thirdly, seeking a shorter term opportunities on offer in the diverse market is crucial but must be done so in a well measured and careful way by keeping the primary focus on the long term.

Finally, avoiding commodities and significant foreign exchange exposure must be done. Research revealed that over the long term, commodities and foreign exchange adds to portfolio volatility without contributing commensurately to returns. Hence, although tactical opportunities will arise, strategic commodity allocations must duly be avoided and currency exposure should be further hedged.

Both the recent sharp decline in the price of copper and oil along with the violent moves in currencies provide credence to these long-term studies. Although there is a need to wait for more friendly weather to bring things to thaw, these four principles are more likely to benefit any investors wanting to avoid a frosty and brittle outcome.

Last Updated: February 2nd, 2021