Margaret Thatcher often used the slogan “there isn’t any alternative” to protect her thought that free markets, free trade and global capitalism was the only way forward. She said it often enough that they was nicknamed Tina.
Investors recently have adopted a similar refrain for his or her belief in equities: they just have experienced no hope of creating any returns of significance without taking on equity, or at the very least credit risk. Bond yields, beaten down by central banks around the world, were virtually no alternative.
But if Tina isn’t already a long-forgotten memory, she should be very soon, gauging from markets ?developments because the calendar considered 2016. Equities have been hammered by the continuing plunge in commodity prices caused by a slowdown in China and too much supply being produced, most notably on the oil front.
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For Canadians, unless they garnered returns from currency gains on investments made away from country, 2015 was miserable for domestic equities, abysmal for commodity-related areas, poor for dividends strategies, and downright wretched for preferred shares or U.S. high yield.
It is apparent that investors could still begin to see the momentum behind these trends translate into more downside risk, further testing their resolve.
One way to dampen the roller-coaster ride of equity investing is to use low/minimum volatility exchange-traded funds. Because the accompanying table shows, the majority of the top 10 funds by assets under management held their own in 2015, even in the final quarter of the year when things really began to go haywire.
Some of the ETFs shown might be obtainable in currency-hedged or unhedged versions, as well as exchange U.S. dollars sometimes, that could come in handy depending on your look at currency trends.
But they are worth taking into consideration at any given time when many are calling for lots of pain. Hedge-fund legend States suggests we’re able to face a crisis echoing 2008, current bond king Jeffrey Grundlach believes 2016 might be ugly for stocks and junk bonds, and Thailand-based maverick investor Marc Faber says a tough landing for China can be done.
There are a few key implications for investors in Canada.
For something, it comes with an alternative: cash. Even though it pays nothing, cash may also dampen the general volatility of your portfolio and allow you to stick with your contact with risks, which there are lots of.
The loonie, for example, dropped below 70 cents U.S. and can remain under pressure, alongside the domestic equity market, until China sees better growth and there’s a better balance between commodity supplies and demand. As for rates of interest, far from normalizing here, could possibly be cut through the Bank of Canada, when in a few days.
The bottom line is that markets, already stressed in 2015, ‘re going for sale. Before too much time, it might become a fire sale. Investors have to be ready and some powder dry, so you have flexibility later.
Yves Rebetez is md of ETFinsight.