Investors to face stock volatility in H2 2016

8 July 2016

Heightened stock market volatility, a low-return environment, and tough conditions for building fixed-income portfolios are expected to remain a top concern for financial advisers, according to State Street Global Advisors' (SSGA) mid-year survey.

In its "2016 Mid-Year ETF and Investment Outlook", SGGA said investors would need to adapt to higher volatility and even consider areas of the market that were traditionally uncorrelated to stocks and bonds, such as gold, to mitigate the potential risks.

According to a study, gold could play a strategic role in portfolios, counterbalancing risks arising from a loss of confidence in central banks or a credit contagion in the Eurozone.

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Also, due to a prevailing low-yield environment, investors might want to consider new opportunities and move ‘a bit further out on the risk spectrum'.

However, according to SSGA's report, they should avoid potentially "overcrowded areas of the market' and focus on high yield corporate bonds, senior loans , preferred shares, convertible bonds and high-quality dividend stocks.

Additionally, in the current and expected environment, they should shift their attention to strong foundation and broad market exposure.

As the low-yield environment persists, investors are getting hungry for income, the study said.

"When looking at the ETF flows so far this year, two main trends immediately jump out: investors are moving into bonds and gold," the study said.

The report also warned investors to be ready for low growth and inflation and that elevated volatility might be additionally boosted by the US presidential election, shocks to China's financial markets, Brexit, or domestic unrest in oil-exporting countries as well as geopolitical tensions in Russia and the Middle East.

"Volatility is here to stay as investors fret over the extended age of the current bull market, a lack of earnings growth, China, Europe and perhaps most importantly, the most divisive US Presidential election in recent memory,"

As far as fixed income portfolios are concerned, SSGA said investors should separate them into three categories such as "core" (providing broad exposure to a diverse set of fixed income asset classes), "complement" (seeking to capture trends and enhance diversification around the core) and "cushion" (seeking short-term exposures with low absolute levels of risk and low correlations to bond sectors).

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