Market Musings 27/02/22:
The Importance of Real Diversification
Podcasts that might interest you:
- Why all these investments after companies have been saving for at least a decade?
- Sector-wise, which companies are investing most?
- What is the future of innovations in technology and healthcare?
- Why is it the right time for investors to ride the wave of investments and innovation?
- How can investors play this theme?
Also available in Apple Podcasts, Podcast Addict, Spotify podcast platforms
(search for “BNP Paribas Wealth”)
Weekly Summary:
- Market correction highlights need for diversification: Most investors should prefer diversification over a very concentrated portfolio
- Public + Private Equity: higher long-term historic returns, but at a high volatility cost
- Government bonds, corporate bonds, private debt: have benefitted from a secular fall in long-term inflation for 40 years. Is it over now?
- Real Estate - commercial, residential: some inflation hedging, prospect of modest capital gains over time, but does suffer during economic recession.
- Infrastructure funds: another real asset class, with some inflation hedging properties.
- Commodities - Industrial Metals, Precious Metals, Energy: has been in a long bear market until 2020, but the best asset class for long-term inflation hedging
- Alternative UCITS Funds, Hedge Funds: typically lower-volatility funds exposed to equities or bonds
- Lower-risk liquid cash alternatives: floating rate bonds, short-term government bonds, short-term corporate bond funds
- Pick of the Week: Xtrackers MSCI World Consumer Staples ETF
1. Market correction highlights need for diversification
With US and European stock markets dipping around 8% since the start of 2022, and the VIX volatility index approaching an elevated level of 40 in recent days on the back of rising Eastern European geopolitical uncertainty, investors have been forcefully reminded once again that stock markets are not a one-way bet, at least in the short term.
This is a timely reminder for investors that portfolio diversification away from just exposure to stocks and/or bonds is highly desirable in the long term. As in 1994, both stocks and bonds have fallen over the first two months of 2022, a relatively uncommon event.
In contrast, commodities as an asset class have risen nearly 14% so far this year, driven by a broad-based advance in energy, industrial metals, precious metals and agricultural products.
Industrial metals, precious metals and agriculture all up in 2022
Source: Refinitiv Datastream
In the past 40-odd years, bonds have acted as an effective portfolio dampener whenever stocks have fallen…
