Photo by REUTERS/Andrew Kelly filesMarket corrections can be a gut-wrenching test of an investor’s tolerance for risk. The typical behavioral responses during times of turmoil are to either avoid the situation, in the hopes it will go away, or to react out of frustration — both of which can have dire consequences.
For those wondering where to start, here are three areas that we are focussing on with both our new and existing clients that can at the very least point you in the right direction.Being a contrarian during market extremes can be difficult, but the approach showed its merit when the euphoria turned into panic, and it will do so again when emotions calm down and the negativity ultimate dissipates.
For example, right now I am one of the few market watchers refusing to throw a taper tantrum on a paltry increase in the Fed rate to one per cent. Actually, I think there is plenty of room for higher interest rates without sending the U.S. into a full-blown recession.
The big question is how should investors replace their bond exposure? In order to hedge against a Bank of Canada policy mistake, we’ve moved the majority of our existing positioning out of Canada to U.S. floating-rate notes and some U.S. inflation-protected notes. We’ve also been adding to structured notes that we consider to be an equity/bond hybrid given their attractive yields, ranging from six to 20 per cent and downside barrier protection ranging from 20 to 40 per cent.
Emerging markets, especially China, are also cause for concern due to ongoing Covid-19 lockdowns. These are further disrupting supply channels that we think will accelerate the movement of manufacturing back to developed markets, with the willingness for consumers to pay higher costs for greater stability in product supply and availability.