The summer holidays are nearly there, especially for students. Everyone is doing their last exams, finishing their theses and preparing their resits. But, the working people do not all have a holiday. The stock markets around the world will continue through the summer. Most of the time, summer period (June and July) is a less volatile period for stock markets because for a lot of investors, especially private investors, it is not their first priority. At the end of the summer, in August, the people are getting back on track with their investments and it leads to a lot of movement in the stock prices. This is also investigated for the past years. But, this year, analysts are forecasting that it will be a very turbulent summer for the asset markets.
Investors around the world do not have a lot of faith in the past performance of the stocks worldwide. According to researches, institutional investors and analysts are preparing themselves for a summer ‘full of shocks’. One of the mayor concerns is, of course, the potential exit of the United Kingdom called the ‘Brexit’. More about the impact of the Brexit for the Netherlands can be found in an earlier article written by Antoine Steen. But, due to these potential shocks, many investors are keeping their money in their pockets. Investors lost the faith in a recovery of the Chinese economy and British stocks are avoided.
According to a recent research by the Bank of America, asset managers say that among them, 27 percent is fearing the Brexit and is seeing it as the biggest threat for the world economy. They are fearing this threat even more than the devaluating currency of China, the Renminbi. Also, one of the other concerns is stagflation, which is a dangerous mix of low growth and increasing inflation.
Michael Hartnett, head of investments of Bank of America, states that the spring break rise is ending. He is seeing diminishing profits of companies in the United States. These decreasing profits are a serious threat for the employment opportunities. He also posits that the upward movement of the US dollar is putting pressure on the emerging markets and markets of raw materials. He is expecting dynamic markets and he is recommending investors not to invest in the S&P500 until the index is back within the range of 1950-2000 index points. Torsten Slok, analyst of Deutsche Bank is saying that markets are underestimating the attractive inflation in the United States and that they do not listen carefully to the central bank of the United States, Federal Reserve. Interest raises are definitely happening in the short run, according to him.
Obviously, investors are taking measures for these concerns to avoid big loses during the summer period. Especially for the reason that during the summer, people are maybe not that conscious as in other periods throughout the year. Almost 35% of the investors reduced their risk exposure for stock of the United Kingdom. This has not happened since 2008. This is definitely a sign that asset managers are very alert about the fact that the British people are doing something impossible. According to the same research of the Bank of America, the exchange rate of the US dollar and the oil price developments are also a huge concern. As a result, asset managers are reducing their risk exposure also on these two investments. Assets managers are also having a higher amount of cash, specifically, 5.5 percent. These levels are exceeding the peak during the European sovereign debt crisis and could be compared with the levels during the time of the chaos around the bankruptcy of Lehman Brothers in 2008. Normally, firms and investors are holding cash in times of raised uncertainty. Bank of America, as well as Goldman Sachs and J.P. Morgan Chase recommended investors to minimize their part in stocks.
But, there are also some new firms in new sectors, which are growing rapidly. It is just a matter of time before investors are going to buy their stocks. These firms could have a huge potential and this can be a way out of the ‘normal’ stocks during the summer.
Besides all the concerns and potential shocks, the main question that remains unanswered is: how could you deal with these problems? Unfortunately, a sole, perfect answer does not exist. But, there are some strategies that you can execute to hedge your investment portfolio against risk.
First of all, you should not invest only in one company, one sector or one country. This should be basic knowledge for every investor. If you will invest only in the United Kingdom and there will be a ‘Brexit’, your entire portfolio will devaluate. Same thing counts if you just invest solely in the manufacturing sector. Many manufacturing firms are located in China. As a result, if China will indeed not improve their economy as a whole, your entire portfolio will, again, devaluate. A good way of investing should be such that you spread your risk by investing in different companies across different sectors in different countries all over the world. If one company, one sector and/or one country will hit your portfolio, the value will just diminish for the proportion that you invested in that company, sector or country.
Second, investors can use derivatives to hedge the downside risk. A famous strategy is to buy a put option and also earn the underlying asset. In this case, when the value of your asset is falling, you can erase that ‘loss’ by executing your right to sell the put option. The only downfall is that investing in derivatives demands a lot of in-depth knowledge in finance.
Concluding, this summer will be very volatile according to many analysts. The inhabitants of the United Kingdom have voted to leave the European Union. The Chinese economy is not growing as rapidly as before. This led to a change in investment decisions and, therefore, the US dollar, emerging markets and raw materials such as oil and gas have a lot of variation in their movements. To hedge yourself against these variations and these risks, you should spread your investment across different areas and/or make use of derivatives. When applying these strategies, you can still enjoy your summer without worrying about your assets.