www.varchev.com

Here's how to diversify your portfolio to protect yourself from a market downturn

Rating:

12345
Loading...

The U.S. stock market, as measured by the S&P 500 index, had a stellar first quarter of 2019, up by 13.1%. However, the U.S. cycle indicator developed by Morgan Stanley suggests that stock prices are near a peak, and it suggests 70% odds of an economic downshift within the next 12 months, though not necessarily a recession, Business Insider reports.

Morgan Stanley's U.S. cycle indicator is based on 10 economic and financial indicators, and smooths the data over 6-month periods. Since April 2010, there has not been a single 6-month period in which a majority of these components have deteriorated, the longest positive streak of this sort since the indicator was developed more than 40 years ago.

Below summarizes the three top recommendations that Serena Tang, cross-asset strategist at Morgan Stanley, is making as a resul

Cut equity allocations, especially to U.S. stocks vs. the rest of the world

Go heavily underweight in high yield corporate bonds

Raise cash and increase holdings of long duration U.S. Treasury bonds

"Historically, such an environment of data improvement breadth and depth (with the likes of unemployment rate and consumer confidence hitting extreme levels in recent months) has meant a high probability of cycle deterioration in the next 12 months--after all, what goes up must come down," Tang wrote in a recent note to clients, as quoted by BI. More details on her investment recommendations are presented below.

Equity Allocations. Investor should reduce U.S. equities to 19% of their portfolios and other developed market stocks to 28%. U.S. stocks tend to lag other developed markets in the late stages of an economic cycle.

High Yield. U.S. high yield bonds are just 8% of the new recommended allocation. The return profile is unattractive now and typically deteriorates further in a downturn.

Cash and U.S. Treasury Bonds. Cash is 11% of the new recommended allocation and 10-Year U.S. Treasury Notes are 18%. Morgan Stanley finds that U.S. Treasury bonds tend to outperform as economic cycles age.

Investment grade U.S. corporate bonds are the remaining 15% of Morgan Stanley's model portfolio allocation. Corporate bond funds have been enjoying record net inflows recently, as investors get more cautious, per research by Bank of America Merrill Lynch.

Another defensive alternative for investors is to seek out stocks with bond-like characteristics, such as low price volatility and stable cash payouts. Based on analysis since 1997, only utility and REIT stocks have sufficiently high positive correlations with bond returns to qualify as close proxies or substitutes for fixed income investments, according to this week's edition of Morgan Stanley's Weekly Warm Up report.


 Trader Georgi Bozhidarov

Read more:

RECCOMEND WAS THIS POST USEFUL FOR YOU?
If you think, we can improve that section,
please comment. Your oppinion is imortant for us.
WARNING: Any news, opinions, research, data or other information contained within this website is provided as general market commentary and does not constitute investment or trading advice. Varchev Finance Ltd. expressly disclaims any liability for any lost principal or profits which may arise directly or indirectly from the use of or reliance on such information. Varchev Finance Ltd. may provide information, quotes, references and links to or from other sites and blogs and other sources of economic and market information as an educational service to its clients and prospects and does not endorse the opinions or recommendations of the sites, blogs or other sources of information.
Varchev Finance

London


25 Canada Square, Level 33, office 50, Canary Wharf London, E14 5LQ +44 20 3608 6256

Universal numbers

World Financial Markets - 0700 17 600    Varchev Exchange - 0700 115 44

Varchev Finance Ltd is registered in the FCA (FINANCIAL CONDUCT AUTHORITY) with a passport in the United Kingdom: FCA, United Kingdom - registration number: 494 045, which allows provision of financial services in the United Kingdom.

Varchev Finance Ltd strictly comply with the statutes of the European directive MiFID (Markets in Financial Instruments). targeting increased efficiency, transparency and uniformity of financial instruments.
Varchev Finance Ltd is authorized and regulated by the Financial Supervision Commission - Sofia, Bulgaria: License number RG-03-02-05 / 15.03.2006

The information on this site is not intended for distribution or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.


Disclaimer:

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 63,41% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

chat with dealer
chat with dealer
Cookies policy