Navigating the Tumultuous Waters: An experts Guide to Investing in a Volatile Market
The investment landscape is facing unprecedented turbulence. Recent market events, like the record-breaking surge of the S&P 500 followed by the rapid decline of US tech stocks after the launch of a competitively priced AI app in China, serve as a stark reminder of the unpredictable nature of the market.
Adding fuel to the fire, impending geopolitical uncertainty and policy changes under a potential second Trump term, alongside a resurgence of inflation driven by factors like tariffs, are casting long shadows over investor confidence. This volatile environment necessitates a shift in investment strategies, and experts are urging investors to diversify beyond traditional assets to weather the storm.
Ernst Knacke, head of research at Shard capital, believes investors need to look beyond the familiar to navigate these choppy waters. “Diversification has become more important than ever,” he emphasizes.
Knacke points to a profound shift in the global power dynamic: “The technologists behind the software and innovation have taken over the White House,” he observes. The influence of figures like Vice President JD Vance, with his venture capital background and ties to tech tycoons like Peter Thiel, and Vivek Ramaswamy, leading the Department of Government Efficiency alongside tech pioneer Elon Musk, signals a important change in policy direction.
“This takeover could be favorable for tech giants like Alphabet, Amazon, and Meta, but investors shouldn’t put all their eggs in one basket,” Knacke cautions. He advises against concentrating to heavily in a single sector, emphasizing the need for a more balanced approach.
knacke also expresses skepticism about the US government’s ability to control its spiraling deficit. He warns, “Trump and the whole MAGA vision is not austerity. If anything,the deficit will probably continue to grow,” setting the stage for challenges in the US bond market. Foreign investors may eventually lose their willingness to fund the US government by buying bonds,potentially leading to a dangerous situation within the next four years.
The traditional 60/40 portfolio, which allocates 60% to stocks and 40% to bonds, is no longer a reliable strategy, according to Knacke. “We’re not going to have this regime of the past 40 years where inflation is nice and flat,around 2%,” he predicts.
He states,”inflation is going to be volatile. It’s going to be uncertain and with that comes the breakdown in correlations [between asset classes].” He believes this will lead to more market environments akin to 2022, where stocks and bonds concurrently plummet.
This calls for a more strategic approach. Knacke believes that current market valuations make equities too expensive to solely rely on for returns, even for investors with a long-term investment horizon.
“Credit doesn’t protect you from inflation and it doesn’t protect you against a blowout of credit spreads so from that perspective, credit doesn’t offer any value at all,” he warns about the limitations of conventional bonds, particularly corporate bonds.
Knacke advocates for a diversified portfolio that includes exposure to equities and government bonds, along with safeguards against inflation through gold and inflation-linked bonds. He also highlights the potential of managed futures
“Strategies that focus on commodity futures have exposure to real assets, which should do well during inflationary periods, thereby retaining the purchasing power of investors’ wealth,” he explains.
Managed futures strategies, he notes, offer an advantage over other option assets like property and private equity due to their liquidity, allowing investors to swiftly sell during market downturns and invest in undervalued assets.
He encourages investors to explore a range of managed futures funds, citing several vetted by Shard Capital, including AQR Managed Futures, KLS BH-DG Systematic Trading, Bowmoor Global Alpha, Aspect Diversified trends and CFM IS Trends.
What is the best approach to diversifying a portfolio in the current volatile market surroundings?
Navigating the Tumultuous Waters: An Expert’s Guide to Investing in a Volatile Market
An Interview with Ernst Knacke, Head of Research at Shard Capital
The global investment landscape is facing unprecedented turbulence. Recent market events, like the record-breaking surge of the S&P 500 followed by the rapid decline of US tech stocks after the launch of a competitively priced AI app in China, serve as a stark reminder of the unpredictable nature of the market. Adding fuel to the fire, impending geopolitical uncertainty and policy changes under a potential second Trump term, alongside a resurgence of inflation driven by factors like tariffs, are casting long shadows over investor confidence. this volatile environment necessitates a shift in investment strategies, and experts are urging investors to diversify beyond traditional assets to weather the storm.
Ernst Knacke, head of research at Shard capital, believes investors need to look beyond the familiar to navigate these choppy waters. “Diversification has become more crucial than ever,” he emphasizes.
Technology’s Grip on Policy
Knacke points to a profound shift in the global power dynamic:
“The technologists behind the software and innovation have taken over the White House,” he observes. The influence of figures like Vice President JD Vance, with his venture capital background and ties to tech tycoons like Peter Thiel, and vivek Ramaswamy, leading the Department of Goverment Efficiency alongside tech pioneer Elon Musk, signals an important change in policy direction.
“This takeover could be favorable for tech giants like Alphabet, Amazon, and Meta, but investors shouldn’t put all their eggs in one basket,” Knacke cautions. he advises against concentrating too heavily in a single sector, emphasizing the need for a more balanced approach.
Government Deficit Woes
Knacke also expresses skepticism about the US government’s ability to control its spiraling deficit.
“Trump and the whole MAGA vision is not austerity. If anything, the deficit will probably continue to grow,” he warns, setting the stage for challenges in the US bond market. Foreign investors may eventually lose their willingness to fund the US government by buying bonds, potentially leading to a perilous situation within the next four years.
the End of 60/40?
The traditional 60/40 portfolio, which allocates 60% to stocks and 40% to bonds, is no longer a reliable strategy, according to Knacke.
“We’re not going to have this regime of the past 40 years where inflation is nice and flat, around 2%,” he predicts.
He states, “Inflation is going to be volatile. It’s going to be uncertain and with that comes the breakdown in correlations [between asset classes].” He believes this will lead to more market environments akin to 2022, where stocks and bonds concurrently plummet.
A New Investment Approach
This calls for a more strategic approach.Knacke believes that current market valuations make equities too expensive to solely rely on for returns, even for investors with a long-term investment horizon.
“Credit doesn’t protect you from inflation and it doesn’t protect you against a blowout of credit spreads so from that viewpoint, credit doesn’t offer any value at all,” he warns about the limitations of conventional bonds, notably corporate bonds.
Knacke advocates for a diversified portfolio that includes exposure to equities and government bonds, along with safeguards against inflation through gold and inflation-linked bonds. He also highlights the potential of managed futures.
“Strategies that focus on commodity futures have exposure to real assets,which should do well during inflationary periods,thereby retaining the purchasing power of investors’ wealth,” he explains.
The Power of Managed Futures
Managed futures strategies, he notes, offer an advantage over other option assets like property and private equity due to their liquidity, allowing investors to swiftly sell during market downturns and invest in undervalued assets.
He encourages investors to explore a range of managed futures funds, citing several vetted by Shard Capital, including AQR Managed Futures, KLS BH-DG Systematic Trading, Bowmoor Global Alpha, Aspect Diversified trends and CFM IS Trends.
Looking Ahead
Given the increasing uncertainty in the global markets, what advice would you give to individual investors who are feeling overwhelmed?
