Our tactical asset allocation model Stronghold, which clients can invest into through SaxoSelect on the platform, had increased its exposure to emerging market equities in the last couple of weeks as the expected returns had improved with improving conditions in Chinese equities. But today’s reaction in emerging market equities is causing the portfolio’s risk measures to flash red and as a result the portfolio will half the exposure to emerging market equities. It is during times of elevated volatility that our tactical asset allocation should react better to risk and outperform more static asset allocation models.
Adding to risk-off sentiment we observe the VIX Index is close to 18, the highest level since October, which means that the equity market is shifting in a different state with lower expected returns and higher volatility. Remember as we have said many times in the past that the 22 level is the magical level where equity markets downside dynamics become very ugly. So stay alert and pay attention to news out of China and watch the VIX.