The end of a 10-year bull run and increased geopolitical uncertainty mean that investors need to adopt a more defensive strategy, according to Triple3 Partners.
As US markets sustain their rally into 2020 – the best-performing bull run since WWII – it’s become less and less likely that the good times will continue.
“People have effectively been borrowing money for free, and when that gets taken away, there’ll be some issues,” said Simon Ho, chief investment officer at Triple3 Partners.
“A 10-year bull market by definition has to stop at some point. The QE program has run its course and there’s no incentive for investors to put money into cash, so the efficacy of QE has rightly been called into question. If that’s no longer a tool of policy, what else is there?”
Mr Ho believes that the tense geopolitical situation – characterised by a multiplicity of threats from Iran and China – could be another cause of disruption. And while the US Federal Reserve has taken a hawkish stance on rates going into 2020, the risk of inflationary stimulus remains for investors.
“We need to find the source of the disruption but it’s often a spike that people aren’t expecting,” Mr Ho said.
In anticipation of increased volatility, Mr Ho believes that investors should adopt a more defensive strategy.
“Retail investors in particular would do well to put their money into something that’s negatively correlated to equities to ensure they’re protected over the course of 2020,” said Mr Ho.
“With the strong investment performance that equity investors have enjoyed since 2008, it would now be prudent for them to consider portfolio protection. Investors need to know that with every year that goes by, there’s a greater risk there will be some sort of pull back, but if you buy volatility derivatives, for example, you can get a negatively correlated performance relative to any underlying equities.”