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. For many traders, multi-asset trading is becoming their tool of choice, not only to mitigate risk but also to capitalise on the markets' volatile movements.
The ancient Chinese saying “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, 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 diversifying not only across sectors and geographies, but also across asset classes such as stocks, bonds, commodities and currencies, investors can reduce asset-specific risk and smoothen out the overall volatility within their portfolios.
Tactical asset allocation
The basis behind tactical asset allocation is the assumption that certain asset classes, sectors, or geographies perform better during different stages of the macro-economic cycle. Therefore, it is critical for investors to identify the asset classes, sectors or markets that relatively outperform in each stage. As such, tactical asset allocation is an active trading strategy that advises investors to adjust the composition of their portfolios in order to take advantage of cycle-specific price fluctuations across sectors, markets and asset classes. Read our analysis on which sectors to be overweight during recessionary markets.
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