Map to navigate volatile seas in markets

Volatility returned with the Covid-19 pandemic and is expected to continue to mark financial markets until the end of the year. Prudence, diversification and flexibility should be key words for investors, say the analysts consulted by JE.

Master the waters well, read the maps and not lose focus on the port where you want to dock, but have the flexibility to adapt in case of storms. The advice extends to any 'sailor' in the financial markets, who in times of high volatility can obtain returns if they choose a diversified and flexible strategy, according to analysts consulted by Jornal Económico.

“We are experiencing a period of high and persistent volatility”, says Carlos Almeida, investment director at Banco Best, who explains that if we analyze the evolution of the VIX - an indicator that incorporates the volatility estimated by investors for the S & P500 - since January 2000, it appears that the most frequent is to present values ​​below 18 points. “Of the more than 5.250 daily observations, the VIX recorded closing values ​​lower (or equal) to 18 points in 53,2% of the cases”, he points out. The analyst stresses that since February 21 of this year, the VIX has recorded, in a continuous way, "values ​​above normal", raising to five months the threshold of months with high volatility in the stock market.

“In the wake of the 2008 financial crisis, for more than 18 months the VIX recorded values ​​above normal. In that period, the average daily observations of the VIX stood at 34 points ”, he exemplifies, to consider the current moment of high volatility as natural in view of the uncertainties that mark the current moment.
"Until the fears surrounding Covid-19 are dispelled and the global economic recovery is consolidated, volatility may remain at levels above normal values," he added.

Pedro Lino, CEO of Optimize Investment Partners, anticipates that the market should register a new peak in volatility “to start this summer, and that has to do with a series of economic, public health and political uncertainties, with the American elections to be the stage for less economy-friendly rhetoric, such as the recovery from the trade war, either between the USA and Europe or with China ”.

The trend is expected to last until at least the end of the year. “As a result of the high stimuli that currently influence the markets, the prices of most assets may be distorted from reality. For this reason, we believe that, by the end of the year, volatility will be high, with governments and central banks resorting to new rounds of subsidies and stimulus whenever the market suffers rapid losses ”, underlines Nuno Sousa Pereira, head of investments fund manager Sixty Degrees.

Prepare the ship for rough waters
The risks associated with a highly volatile environment are high, so experts advise caution. “With the high volatility, there are also greater risks of making mistakes and costing more. What must exist at all times is to monitor the evolution of the economic situation of countries and the world and the financial situation of companies, looking for structural changes in business models or sectors ”, warns Pedro Lino. Optimize's administrator exemplifies what happened in the first quarter: “the sectors most affected by the pandemic were the most affected and some of them, such as aviation, tourism, are facing structural changes in their business models. In that case, it was an opportunity to sell these sectors before the March panic, avoiding the collapse of these sectors ”.

For Carlos Almeida, the key to the strategy to obtain the best returns is “diversification due to the multiplicity of assets and risks associated with a portfolio” and “investment discipline due to the medium / long term focus and regularity in periodic reinforcements”. Allied to moderation by the discernment in making investments in different cycles of the financial markets (not investing only in good times, nor leaving in bad times) ”complete“ the virtuous investor trilogy ”.

Nuno Sousa Pereira stresses that investors "should prioritize an asset allocation strategy with high flexibility, in terms of risk allocation, in order to take advantage of the best opportunities that the markets offer at any given moment".

"Investment strategies with minimums and maximums of exposure by asset class may not be the most effective instruments for managing financial assets in a context of high volatility and positive correlation of financial assets", underlines Carlos Almeida.

On the other hand, Pedro Lino explains that flexible funds, which offer the possibility of being able to be invested between 0 to 100%, allow that “in a period of greater volatility and uncertainty they can in the last case be 100% in liquidity, protecting the assets of the funds of these moments ”. In this way, this flexible management, he says, also allows for sector reallocations, "namely to the most defensive ones without the need to follow the composition of the indices", which "reduces volatility vis-à-vis the market".

Carlos Almeida points out the technology and health sectors as the trends that should focus attention until 2025. “If technology results from the change in consumption patterns and the advent of new business models, where our world will become even more technological and digital , in terms of health, telemedicine is a visible part of the transformation we are witnessing ”, he explains.

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