Volatility, inflation, spiking yields, and other jargon

The week that was saw a marked shift in investor’s problems from the NSE shutting down for hours to wild swings in all financial markets. US crossed the dubious half million-Covid-19 deaths mark with newer strains surging across other nations and governments racing to vaccinate their vulnerable population.

While Gold was relatively muted, Equities saw straight days or 100 bps plus losses and Bond markets gave a thumb down to rates and inflation expectations worldwide. The risk in India was amplified in the absence of core domestic investor support and say 10 yr. Gsec yields hitting 6.20% and beyond. The long and short of it was gloom and doom with retail securities scurrying for cover.

The silver lining was that the long-suffering Mid-market segments saw a vote of confidence without paring losses. Commodities continued an upward trend with the CRB Index delivering 13.5% in USD terms since the beginning of the year. Countries like Israel successfully vaccinated large portions of the population with India also hitting the ground and generating significant goodwill by shipping Indian-made (albeit contract manufactured) ones far and wide, allaying to an extent global recovery fear.

With real assets like REITS (Real Estate Investment Trusts largely Office rental yields) and some InVits also sowing a marked yield correction, the big ask for investors is whether to stick to existing allocations or readjust (tactical or strategic) distributions.

In a Business Insider article, market participants like UBS’s chief investment officer of global wealth management, Mark Haefele are quoted as saying investors should brace for a near-term spike in inflation but concerns about a long-term rise are overblown while others like Bank of America are talking about a difficult but doable balance between short term inflation without the Fed tightening. Which presents an opportunity in the short term? If there is an over reaction in the markets, as also pointed out by the RBI Governor in an interview on TV last week (and I am paraphrasing here), then for smart money, this is an opportunity to rebalance their portfolios to take advantage of the volatility. Ideally, this would be profit booking in some asset classes and buying in those which have cracked.

On the other hand, this also allows those with equity overweight portfolios to start with a proper diversification strategy i.e. Just spreading risk over geographies is probably a poor risk management strategy at an overall portfolio level as those are subjected to both decaying and spiking correlations - neither of which portend well for the longer term.

The other observation has been the final nail in the coffin of 60/40. With Debt Equity correlations spiking for the nth time in the last decade, a pure Debt plus Equity portfolio will see significant mark to market dip as the supposed hedge against stock market falls also crashes.

The proof of this has been “Balanced Funds” not finding favour with distribution or community both on account of waning investor interest and rejigged commission structure. Instead, there have been attempts by Asset Managers to cobble together shrink wrapped one-size-fits-all actively managed asset allocation products (which are diversified across geographies as well as asset classes to replace the balanced fund.

In my opinion, these are not likely to be risk-parity portfolios but may be suitable for those looking at experimenting with multi asset investments. As always, it is advisable to do one’s own research before investing or seek assistance from a qualified, experienced, and licensed professional.