What happened in April?
For the first time this year, investors got nervous about whether the stock market rally that began in October last year was at risk. Stock market volatility increased, a sure sign of increasing investor concerns. The so-called global fear gauge, the VIX Index, rose to almost 20 in mid-April before retracing to 15, after steadily tracking below 16 for the first three months of the year.
Against this backdrop, the US stock market slid almost 3% in April while South African equities managed to buck the trend, adding 1%. For the year to date, the S&P 500 is still 6.9% ahead but the JSE All Share Index has declined about 2% on uncertainty ahead of the elections this month.
What is there to worry about?
- Geopolitical risks:The prospect of a wider war in the Middle East ramped up when Iran made an unprecedented direct attack on Israel and Israel retaliated. Since then, there’s been no escalation in the hostilities, but the risks of a broader war remain elevated.At home, the elections are top of mind. The ANC is expected to lose ground – and possibly its majority – this month. Most political analysts see a coalition as the most likely outcome. Coalitions have met with mixed success globally and locally and thus we can expect more uncertainty.
- Macro-economic risks: Adding to geopolitical concerns flaring up during the month, the prospect of interest rates coming down as hoped for in June is looking more distant. Inflation remains sticky and in the US, growth has started to show signs of strain.
- Financial market risks:Financial markets are also signalling a concern with the growing level of US government debt – and whether investors will be willing to fund it. Why should we care? As the world’s safe haven investment, US government bonds are a temperature gauge for global investor sentiment.
What you need to know about risk
- Risk-reward ratio:Every investor should be viewing the world of investing through this lens, understanding that for every unit of reward they expect to receive from an investment, there will be an associated unit of risk. For instance, equities have offered investors higher returns than other asset classes over time in return for the typically higher risks of volatility and risk of losing your capital. Historically, government bonds have offered lower returns because they offer more safety and less risk than equities (it’s crucial to note that bonds do still carry some risk).
- Bottom line:Now, more than ever, it’s important to ensure your investments are diversified across asset classes and geographies so that any potential losses will be countered by better relative performance in other parts of the portfolio. At worst, big losses in some assets could be cushioned by smaller losses elsewhere.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.
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