Investments for times of high volatility

It is becoming more and more common to hear that we are living in unprecedented times. The speed with which the world is changing, as well as different events, have made it a necessity to have instruments that can help navigate episodes of volatility and mitigate investment risk.

The first months of 2022 are being marked by the conflict between Russia and Ukraine, which has clearly destabilized the markets, being the second worst start to the year in more than 100 years. In this environment, it has been seen that the stock markets accumulate losses of more than 10%, while the debt markets, usually perceived as lower risk or as safe haven instruments in uncertain environments, have also been negatively affected. This means that most of the available investment universe has failed in its task of generating returns.

The overall picture does not look so encouraging and investors are likely to maintain this risk-off sentiment in the coming months. Rising inflation due to increases in raw materials caused by the aforementioned conflict, as well as the interruption of supply chains by Covid-19, are pressuring Central Banks to increase their interest rates and withdraw some economic stimulus seeking contain the rise in prices.

The foregoing means that we are living in an environment in which economic growth may begin to slow down and, at the same time, people’s purchasing power may be diminished, which is not favorable news for investments.

Given this scenario, there are several financial assets that function as “compensators” or “safe haven assets”. The first, and which had gone unnoticed due to its low yields in the last 10 years, is gold. This precious metal works very well in inflationary scenarios such as the current one, in addition to the fact that it tends to have an inverse behavior with respect to the stock markets (that is, when the stock indices fall, gold usually has a positive return). Another widely used instrument for volatility environments is the dollar, being the refuge instrument par excellence. A well-diversified investment portfolio that has defensive instruments such as those already mentioned, will tend to behave with fewer shocks.

Finally, it is always good to have the advice of an investment specialist to navigate these episodes of volatility and not lose sight of the fact that, although the markets may have ups and downs in the short term, normally over longer investment horizons, most times, they will tend to have positive returns.

*The author is VP Client Strategy- BBVA Asset Management.

[email protected]

Leave a Comment