Market News & Analysis
Why is everything being sold?
Tony Sycamore March 13, 2020 12:10 PM
On the eve of Friday the 13th, U.S. equity indices suffered their largest one day fall since the 1987 stock market crash. Globally, key equity markets have exceeded most downside expectations stemming from Covid-19 and are now approximately -30% below their highs from just four weeks ago.
Contagion from equities markets has spread across asset classes including traditional safe-haven assets, U.S Treasury bonds and gold and prompting the question “Why is everything being sold and where is the selling coming from?”
As mentioned recently, when prices across different asset classes fall simultaneously, it often indicates leveraged investors are either reducing their risk/positions across the board, being margin called or investors are withdrawing money.
Risk Parity Funds would appear to be vulnerable to the type of moves viewed across various asset classes this week and may be partially to blame for some of this week's downside acceleration.
As opposed to a standard Balanced Fund that holds 60% of its assets in stocks and 40% in bonds, Risk Parity funds hold a higher allocation of their portfolios in bonds (sometimes using leverage) at the expense of equities as modelling confirms the volatility in bonds is far lower than that of equities. Risk Parity funds also include commodities such as gold and oil in their portfolios to provide increased diversification.
Risk Parity Funds first emerged in the mid 1990’s and gained popularity after the Global Financial Crisis as they outperformed traditional Balanced Funds. Their larger portfolio allocation into bonds and the subsequent rally in bond markets providing some nice offset to the losses from the equity component of portfolios.
The rapid moves in markets this week is likely to have forced Risk Parity funds and other similar volatility targeting funds to deleverage and rebalance, creating a vicious cycle of selling across asset classes.
Potentially the bigger question around Risk Parity Funds is this. In a world that is swiftly returning to zero interest rates and where bonds can then only provide limited portfolio returns and by definition diversification, will the events of the past week end the popularity of Risk Parity strategies once and for all?
Source Tradingview. The figures stated areas of the 13th of March 2020. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation
This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.
GAIN Capital Singapore Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the GAIN Capital group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), GAIN Capital Singapore Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact GAIN Capital Singapore Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.
In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither GAIN Capital Singapore Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.
GAIN Capital Singapore Pte. Ltd. is not under any obligation to update this report.
Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.
Cryptocurrencies are not legal tender currency and trading of derivatives on Cryptocurrencies are currently not covered under any regulatory regime in Singapore. Consequently, investors should be aware they do not have protection under the Securities and Futures Act (Cap. 289). Please ensure that you are fully aware of the risks.