Market Volatility and Investments I How To Invest in Volatile Times
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Fear or Goals: What to Chase in Times of Market Volatility

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With market volatility being at an all-time high and the trading floor as erratic as a teenager’s mood swings for a while now, most investors are finding the task of keeping calm and not making rash decisions quite challenging. As many investments are linked to foreign markets, international events like trade wars, oil crisis, and sanctions deeply influence the stock market. We are living in a volatile era, and therefore, must learn to navigate the ups and downs in a way that prevents us from making mistakes that can affect our financial future. With that in mind, let us look at how the current state of affairs on the international stage can affect the stock market!

The U.S. and China Trade War

Since his official inauguration as the President of the United States, Donald Trump has made his feelings about China’s trade policies quite clear by launching investigations into the same. In 2017, the US imposed tariffs on a multitude of Chinese products, and Beijing retaliated by doing the same, sparking a trade war between the two countries. Though the two countries did decide to take a break from imposing tariff after tariff in the hopes of striking a deal, their trade war sparked in earnest in 2018, when President Trump imposed heavy tariffs on over 1,300 products coming in from China. The reasons stated for the same included China’s unfair trade practices and the intellectual theft that comes with mimicking US patented products.

China then responded by imposing tariffs on 128 US goods that are imported from the country, and the rest was history. The two countries have been locked in a never-ending back and forth of tariffs, with the US firmly believing that they lose over $ 500 million every year due to China’s unfair practices, and China retaliating to what it believes is the unfair imposition of tariffs. Although the two countries engaged in peaceful talks during the G20 Osaka Summit, tariffs already imposed will remain in place, meaning that the effects that these new laws have had will continue to have their own ripple effects on the stock market.
Over the last year or so, the stock market has seen a bit of a roller-coaster effect, with phenomenal dips and highs. When the initial tariffs went into effect on July 06 2018, the stock market in the US soared as a result of positive job reports. By August, China was ranked third in terms of market capitalisation, a position lower than what it was before the trade war began.

Although the National Retail Federation of the United States published a report stating that the 25% tariff on Chinese goods can help U.S. consumers earn $ 4.6 Billion in annual payments, there have been many early victims of the trade war too. These victims come in the form of U.S. based and international companies, which is where your investments and the stock market come into the trade war. The following industries have borne the maximum brunt of this war:

Automobile:

With an almost 40% tariff placed on US made cars, brands like General Motors and Ford have suffered great losses, causing their stocks to dip. Jaguar Land Rover, which is the biggest car firm to come out of the U.K., also reported a loss due to the ripple effects of the trade war. BMW and Tesla both have increased their prices in order to combat the heavy duties placed on their products in China.

Food and Drink:

As a preemptive measure, a few food and drink brands are also increasing their prices to cut their losses as much as they can. Tyson Foods showed a lower profit forecast thanks to the retaliatory duties placed on U.S. exports on pork and beef that have lowered the price of meat. Similarly, Coca Cola has also raised its prices in the U.S. due to the higher metal prices and freight rates.

Additionally, companies are steering clear of conducting business with China in the hopes of preventing losses. Toymaker Hasbro has decided to pull out manufacturing from China all together.

With these tit-for-tat tariffs and the ongoing trade war, the International Monetary Fund predicts that global growth will be shaved off by 2020 by 5%. China’s manufacturing sector is also seeing a major decline. Furthermore, according to estimates released by Morgan Stanley, one can expect a decline of 0.81 percentage points for the global GDP due to this trade war.

trade-war-effect-on-economy

Goldman Sachs predicts that “US tariffs (without retaliation) provide a small boost to the US, and are painful for Canada and Mexico given their large trade exposure to the US (dark blue bars). Retaliation hurts the US (making the net effect on output negative) but helps the trading partners, particularly Canada which has a trade deficit and large exposure to the US (light blue bars).

An “all out” trade war (grey bars) is particularly painful for the surplus economies, including the Euro area, Japan and China. The 10% equity drop hurts everyone, but the DM economies more so than EM (green bars).”

(Source: ZeroHedge)

The trade war has been one of the biggest threats to the stock market in 2018, and it seems as though it will continue to be one in 2019 as well. Though the two countries have waved the proverbial white flag for the time being, one cannot predict the results of another rash tweet in the future!

With so much uncertainty on the line, it is not surprising that most investors are staying away from stock market investments. However, experts from Wall Street believe that though the Trump administration begins each new phase with a terrifying and unpalatable threat, they always seem to backtrack to a point that feels more digestible to the people they are negotiating with. Keeping this in mind, experts believe that the same will happen by the second half of the year, which will bring the market to a much more stable position than it currently is in!

The bottom line is that investors must exercise caution, but can certainly consider the stock market as a viable investment option, in spite of the media headlines that incite fear about the same!

U.S. Sanctions on Iran

Sanctions are a form of foreign policy wherein a country imposes a fine on another country or individual from another country. One can see it as a dangling carrot wherein the country imposing the sanction wants the other one to change its behaviour. In recent times, U.S. sanctions imposed on Iran have rocked the international markets, leading to high levels of market volatility in the stock market.

What started off this volatility was Donald Trump’s firm stance against Iran and the Nuclear Deal, and his subsequent pulling out of the deal. Along with that, he also decided to reimpose the sanctions on Iran. Both, the bonds and stocks market reacted quite favourably to the change while oil itself also saw two major price hikes. This is mainly because these sanctions will result in a significant reduction in Iran’s oil trade, which will then result in a huge reduction in the global supply of the same.

Additionally, experts are a little wary when it comes to oil stocks as an economic impasse resulting from a potential undermining at the hands of the EU if they decide to negate these sanctions! However, having said that, most experts do still encourage investors to consider oil stocks when reviewing their portfolio.

Middle East Oil Crisis

The sanctions imposed on Iran ended up having a significant impact on the oil crisis in the Middle East, with most of the major political players in the world still on their guard regarding this issue. The huge meltdown that occurred in the oil markets led to a bearish market, with prices dropping significantly to the point where it began to spook most traders that lay their faith in oil.

Blast from the past: The last oil crisis of 1973, caused what is known as an “oil shock” around the globe and was an important factor in the 1973-74 U.S. stock market meltdown. Following the oil embargo imposed by Arab countries, the price of oil in 1974 had risen up from $3 to nearly $12 per barrel ($75 per cubic meter), equivalent in 2018 to a price rise from $17 to $61 per barrel.

The oil crisis caused both inflationary and deflationary impacts, and led to a change in competitive positions in many oil-dependent businesses like the automobile industry.

With Trump’s announcement regarding the sanctions on Iran, the price of crude oil did increase for a while. But then, Saudi Arabia amped up its oil production in order to respond to what it thought was the need of the hour. However, true to form, the Trump administration then took a much softer approach to these sanctions (as it generally tends to do after making ludicrous announcements), and allowed countries like India, China and many others to continue buying oil from Iran.

This led to a huge supply glut, and the price of crude oil dropped significantly as a result.

Of course, there were other factors at play too, such as shale oil boom in the U.S. which has led to the country becoming the biggest producers in the world since 1973. With all of this, crude stocks were shed faster than snakeskin. Dow tumbled as much as 600 points towards the end of 2018, one of the worst performances that it has seen in a long time.

Brexit

The good news here is that the Bank of England believes that banks in the U.K. can survive a no-deal Brexit and a global trade war simultaneously.The bad news; there is no way that the market volatility a hard Brexit will bring can be tempered. From rumours of the Queen needing to be evacuated to a certain dearth of essential daily items, Brexit will be a lesson in surviving mood swings of a financial kind. The pound is sure to face even larger dips; it has already fallen to a 27-month low versus the dollar at the time of writing.

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Economists warn that this value shedding will continue right up to the next deadline (October 31). While the EU has promised to keep Northern Ireland in mind when finalising the deets of this economic divorce, the political powwows in U.K. seem to be ignoring the Irishmen altogether. Even after voting in majority for U.K. to remain part of the Eurozone (56% of the Irish wanted to stay), Northern Ireland will face the brunt of this decision, and a retrogression to the pre-’Good Friday Agreement’ days. Then it was liberty at stake; this time it will be exports of beef, construction materials, and timber.

One can hardly blame investors for being extremely skittish about the stock market at this point! All these factors lead to a very pertinent question that every investor has asked at least once:

Asset Liquidation: Is Now the Time to Do It?

Predicting the future is an inconceivable task and the closest you can come to knowing what returns you ought to get in the future is through logic that can be substantiated by curated facts and genuine statistics.

In the last few years we have witnessed the U.S. market post a strong rally despite the rising trade war, Iran tensions, and even the Forex currency war. The current market landscape is rife for speculation and fear of a downside. Such climate sees many investors choose to liquidate their portfolio and switch to bond ETFs like IEF (iShares 7-10 Year Treasury Bond ETF) and LQD (iShares iBox $ Investment Grade Corporate Bond ETF). This sounds like an ideal move, but only if they don’t get intimidated by the rising market or succumb to the fear of missing out, bank on their decision-making skills instead of ‘timing’ it.

Diversification has always been key to surviving such volatile markets. It is wise to spread your assets’ allocation across strategies. In situations such as the one we are facing now, you can look at dialling up your high grade fixed income portfolio, adding some REITs (since they do well in low rates scenario), investing in gold and other precious metals, and cutting down on equities. For sophisticated and proactive investors who have the time and high-risk appetite, investing in long and short-duration bonds (called the Barbell approach), with some downside protection via options and value investing in long-term equity can be a good option.

But if you do choose to liquidate, you can look at SIPs or systematic monthly investments as a way to keep being a part of the market with low amounts and risk. You can start by setting up a standing instruction to build a medium to a long-term portfolio and add $1000-$2000 every month. Unless the markets take a severe beating you can always add more, say $5000, and build your portfolio back.

Give Up or Chase Goals: How Do You Counteract Market Volatility

Ultimately, what it boils down to is the fact that the market is unpredictable (and will continue to be as long as Donald Trump has access to Twitter). As an investor, it is imperative that you don’t place all your eggs in one basket, and also find a way to invest in the stock market without having to endure sleepless nights. John Clifton “Jack” Bogle once said; “Time is your friend; impulse is your enemy”. And I’m hard-pressed to find a better quote to define the markets today, and the collective investor attitude required to bear through it.

To wit, I’d like to end with saying that not all is lost for the wise investor who has patience, statistics, and safe-haven investments like bonds, gold, and low-cost ETFs on their side. It’s more important to have a global approach to one’s investments in today’s times than ever before; and one should look at emerging markets and new investing opportunities to shore up their portfolios against the tidal waves of rumour and market volatility – at Kristal.AI, we do this time every single we help our clients build their portfolios. If you need help, we’re just a mail away at hello@kristal.ai.

 

 

Disclaimer

The materials and data contained herein are for information only and shall in no event be construed as an offer to purchase or sell or the solicitation of an offer to purchase or sell any securities in any jurisdiction. Kristal Advisors does not make any representation, undertaking, warranty or guarantee as to the update, completeness, correctness, reliability or accuracy of the materials and data herein. All opinions, forecasts or estimation expressed herein are subject to change without prior notice. Kristal Advisors and its affiliates accept no liability or responsibility whatsoever for any direct or consequential loss and/or damages arising out of or in relation to any use of opinions, forecasts, materials and data contained herein or otherwise arising in connection therewith.