Summary: In today’s global markets, geopolitical and economic risk are ever-present. To protect your portfolio, you’ll need a strategy that defends against those risks – and for many traders, multi-asset trading is becoming their tool of choice, not only to mitigate risk but even to capitalise on the markets’ volatile movements.
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The ancient Chinese curse “May you live in interesting times” has probably been on every trader’s mind during 2019. The US-China trade war has been escalating – this summer, the US expanded its tariffs on Chinese goods to US $250 billion, threatening to bring the total to US $300 billion in the future.
The trade war’s impact on the markets has been considerable, wreaking havoc on the tech, auto and agriculture sectors. In May 2019, when the US announced it was increasing tariffs from 10% to 25%, the S&P and the Dow both fell over 2% over the following week. The damage was even higher for the tech-heavy Nasdaq, which fell more than 3.3%.
And it’s not just the US markets being jolted by economic and political events. The trade war waves have reached Germany, where weaker demand for machinery and cars has seen exports decline in the second quarter, while the UK is still being rocked by the fall-out from Brexit, with the GBP weakening dramatically since the 2016 referendum.
Risk mitigation through diversification
While economic uncertainty is seemingly becoming the new normal, pursuing a diversified trading strategy through multi-asset trading is a way for traders to mitigate unsystematic risk. More specifically, by investing across asset classes such as bonds and FX, or across different sectors and geographies, one can reduce asset-specific risk.
Tactical Asset Allocation
The drivers of an economic cycle can be granulated into specific indicators, including the yearly change in Baa-Aaa corporate bond spreads and the annual gold price change. Increased Baa-Aaa spreads and positive gold price changes constitute recession characteristics, where investors seek safe haven investments such as government bonds. In contrast, a falling gold price and decreased spreads are signaling an expansion phase. Correlation between equity market performance and negative gold price changes was seen in 2013, when the best performing year for U.S. equities since the financial crisis was accompanied by a large gold price drop.
As economic cycles have different phases, key in a trading strategy is to identify the asset classes which relatively outperform in each period. Tactical asset allocation is an active trading strategy that change the percentage of different asset classes to take advantage of pricing fluctuations in the market.
SaxoTraderGO: Access to more than 40,000 instruments
As a pioneer in multi-asset trading, we early on identified the benefits of trading across asset classes, sectors and geographies. Today, Saxo provides access to more than 40,000 instruments through our intuitive trading platforms.
Having access to a full range of asset classes has turned out to be a huge advantage not only for retail traders but also for institutions such as banks and wealth managers, who are able to reduce internal costs and comply with increasing regulations more intuitively by using just one trading platform.