“Value stocks may do well in an environment characterized by higher inflation, higher rates and the continued reopening of the global economy.
Safety in quality
“Furthermore, quality companies are natural ballast to add value to, particularly during periods of inflation when pricing power and strong balance sheets are an advantage. On the fixed income side, exposures to High-yield bonds, municipal bonds, convertible bonds, inflation-linked securities and emerging market bonds could also help diversify interest rate risk,” Kingston said.
A spokesperson for HSBC World Bank suggests investors protect themselves in times of volatility by diversifying their portfolios and avoiding concentration of risk.
Another good rule of thumb is to follow the advice of 1980s American hip-hop group Public Enemy, avoiding the noise around certain stock market stocks and making sure you don’t believe the hype.
And the best way to avoid volatility is to “diversify across a range of assets, industries and geographic exposures,” the HSBC spokesperson said.
Kingston points to the views of the BlackRock Investment Institute which point out that “we remain overweight in developed market equities, and prefer a barbell approach, balancing structural growth in US equities with attractive cyclical exposure to European and Japanese equities.
He says that despite heightened uncertainty, investors are not shedding cyclically inclined segments of the market that are most likely to rise or fall due to macroeconomic factors in the economy.
Interestingly, iShares sees an upbeat growth outlook and “rising nominal yields support a rotation into cyclicals.”
“For example, we saw exchange-traded financial products (ETPs) being a major beneficiary of this trend, with a record US$10.6 billion added globally to the sector in January,” says Kingston.
“Meanwhile, inflows into value factor ETPs also increased (US$2.0 billion year-to-date).
“Furthermore, European equities are also benefiting, given their strong tilt towards cyclical sectors. Investors added US$7.9 billion to European equity ETPs globally in January – the largest monthly allocation since May 2021,” Kingston said.
Kingston and HSBC see the environmental, social and governance (ESG) theme continuing its upward trajectory in the investor space, especially now that more than two-thirds of the global economy has committed to achieving net-zero emissions targets.
“We expect to see further opportunities, whether through investments in technologies, services and equipment to achieve these goals.
ESG a long-term game
“Another key trend is how we live with inflation. Clearly, inflation will persist through 2022, eventually settling above pre-Covid levels. This near-term backdrop could be supportive for structural commodity-related themes,” Kingston said.
According to HSBC ETF, investors should recognize both that ESG is a long-term game and that the exact mix of asset classes that is right for you will depend on your risk profile and investment objectives.
A typical “balanced” portfolio might have around 50-70% exposure to equities, with 20-40% exposure to bonds – split roughly equally between Australian and global markets – with the remainder in cash.
“If you are willing to tolerate greater return volatility – in exchange for higher long-term expected returns – you can increase your equity exposure, while if you are more risk averse you can reduce it,” said said the HSBC spokesperson. .
Alternatively, investors may choose to combine a hybrid exposure instead of a bond and/or equity allocation.
More adventurous investors could even add exposure to commodities, such as an ETF that invests in gold bullion, which offers clients access to over 400 ETFs and managed funds covering a range of themes, sectors and strategies. .
The allocation of investments in gold bullion is just one example of how diversification could potentially reduce investment risk, because if one part of the portfolio performs poorly over a period of time, this could be offset by the best performance of another part of your portfolio.
On the ETF front, Kingston concludes that iShares sees opportunities “both in the long term, by building portfolio resilience through large-scale ESG ETF allocations, and in the short term, where some thematic ETFs can help investors target exposures that may lead to outperformance. ”.
Andrew Campion, Managing Director – Investment Products for AX, says diversification is key in times of volatility.
“Diversification involves holding a variety of assets that are uncorrelated to each other,” says Campion.
“A well-diversified portfolio is one that includes a mix of ‘growth’ assets such as stocks and ‘defensive’ assets such as bonds and cash.”
Investors should be aware that periods of volatility are a natural feature of markets and can help limit complacency and excessive risk-taking, he says.
“They have to be careful not to try to ‘time the market’ because picking turning points at all times is almost impossible, and even more difficult when volatility is high.
“Investors should regularly assess their portfolios against their risk appetite, financial goals and investment horizon, i.e. how long do they need the money they have invested for other purposes.”
HSBC recently launched a service for experienced high net worth (HNW) investors which is aimed at a select group of individuals and has a number of checks and balances to ensure that those who adopt the service have the skills and knowledge to manage their own portfolios.
If you want to find out more about how HSBC can help you with ETFs, call the HSBC Investments Desk on 1300 308 019 (or +61 2 9005 8027).