In today's economic and financial landscape, navigating risk has become increasingly challenging due to many factors impacting the global economy and financial markets. The complexities are extensive and quite unlike anything experienced in decades, if ever before. The issues are contributing to the uncertainty and inconsistent market behaviour:
- High inflation
- Rising interest rates
- Wages pressure
- Falling earnings
- Geopolitical conflicts and war
- The renewable energy transition
- Supply chain disruptions
Inflation, a significant concern in the current economic climate, will likely remain elevated longer. While it may experience fluctuations, it is expected to stay above the target range set by central banks. It poses a challenge for investors as they need to consider the potential net impact of inflation on their investments and adjust their strategies accordingly. In such a complex environment, investors must adopt a risk management strategy tailored to these circumstances.
One approach to managing risk in this complex market is to seek assets with a low correlation to equities. Investing in assets such as precious metals, commodities, and tangible assets can provide diversification and serve as a hedge against market volatility. These assets tend to behave differently than traditional equities, offering a degree of protection during uncertain times.
Three scenarios are worth considering when assessing the potential outcomes of complex market circumstances.
- A rapid recovery is considered highly unlikely, given the prevailing challenges.
- A soft landing where the economy slows down without experiencing a full-blown recession. This outcome is less likely in the US and Europe but may be possible in countries like Australia, benefiting from a growing population.
- A dislocation scenario - characterised by a significant correction in asset values, a credit crunch, a recession, and an earnings downturn.
Several indicators, such as rising credit defaults and concerns over the stability of US banks, point towards the possibility of a more negative outcome.
Considering the real threat of these potential risks, prudent investors should assess both risk and opportunity. Lowering exposure to assets susceptible to declining values can help mitigate losses. Meanwhile, preparing to capitalise on growth opportunities once values have bottomed out can provide a strategic advantage. This requires carefully analysing market trends, fundamental data, and financial indicators to identify undervalued assets with growth potential.
Risk management in a complex market environment also demands vigilance and continuous monitoring. Staying informed about evolving economic conditions, geopolitical developments, and shifts in market sentiment is essential for making informed decisions.
Additionally, maintaining a diversified and actively managed portfolio can help ensure that risks are appropriately spread across different asset classes and sectors in a time-sensitive manner.
In summary, managing risk within a complex market circumstance requires a proactive and adaptive approach. Investors should consider assets with low correlation to equities, remain vigilant about inflationary pressures, assess potential outcomes, and prepare to capitalise on opportunities. By adopting these strategies and staying informed, investors can navigate the complexities of the current economic and financial landscape and position themselves for long-term success.
The Dynamic Asset managed account solution gives advisers a plug-and-play answer to current and future circumstances. Portfolios are actively managed using Dynamic Asset Allocation (DAA). Portfolio construction is undertaken in real-time according to the prevailing risk-weighted return opportunity. Also, portfolios contain well-diversified assets.
The current approach is to maintain a low equity weighting and balance risk with commodities, precious metals and other real assets.
The strategy can be summarised as 'protect and prepare'. It's a pragmatic and prudent approach because a more inflation-aware and diversified portfolio is better suited to today's risks and retains the option to take advantage of better equity values ahead.
Contact us today to learn more about how Dynamic Asset can help you to manage portfolio risk and capitalise on upside investment opportunities.
