Tuesday, 28 April 2020

VOLATILITY IS HERE TO STAY; HOW TO MINIMIZE RISKS IN YOUR PORTFOLIO

Hussein Sayed,
Chief Market Strategist at FXTM

Oil prices are back into positive territory, a statement we never thought worthy of saying before. Both major oil benchmarks are recovering for a second straight day with gains exceeding 12% at the time of writing. The US is preparing for another round of stimulus, taking its overall financial aid to nearly $3 trillion dollars. New infections and deaths from the coronavirus have slowed, particularly in the US and Europe.

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These factors together led to a strong rally in US equities yesterday and have provided some support to Asian markets today. But given that the global economy itself is breathing on life support, and artificial ventilation whenever needed, no one can be sure with a high level of certainty how equities and other asset classes will perform in the coming months. What we know is volatility will stay with us for a while and that is the kind of ‘new normal’ we need to deal with over the forthcoming weeks and possibly months.

At this stage we are already in a recession, possibly a deep one. The question that needs to be answered is how bad might it get? Over the past four weeks, more than 22 million Americans have filed for unemployment, virtually erasing all the jobs created since the global financial crisis in 2008. Today’s initial jobless claims are expected to show another 4.5 million Americans filed, taking the total figure to approximately 26 million and sending the unemployment rate above 15%. While many of us still hope we go through a V-shaped recovery, especially given all the fiscal and monetary support provided, the reality may be very different.

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It is true that the economy was intentionally closed down by governments to fight the most infectious virus in a hundred years. However, turning it back on will not be as simple. Jobs will not return as fast as they disappeared, many small and medium businesses will cease to exist, but the scariest outcome of this period is how consumers will behave post-Covid-19.

Most of us are afraid to return to normal activities and the longer we stay without vaccination and proper treatment means we will not go back anytime soon. Consumers, even with jobs, will be reluctant to go out shopping, not just because they are afraid of losing their jobs, but for the sake of their health and their families. That simply means more pain for businesses, less willingness for banks to lend and a terrible outcome for the global economy.

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Of course, this may vary from one country to another depending on their readiness to reopen their economies. The threat of new outbreaks remains high and that’s why reopening economies should be done in small baby steps.

While we hope we don’t enter into an economic depression, there are signs that indicate it might be coming. One way to protect portfolios for more downside is through buying put options, but given the current volatility levels, those options will be excessively expensive. Gold may be a safer bet, as weakening equity markets, along with negative real rates and continued fiscal and monetary stimulus should all provide another boost to the precious metal. Expect gold to overtake the 2011 peak of $1925 over the upcoming months.

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