Are we heading for another market crash?
If we are, what can you do to protect your portfolio?
Far from our being free of the recessions which have dogged UK and global growth in the recent past, it seems bad news is again bubbling to the surface.
On Thursday last week, Christine Lagarde, the managing director of the International Monetary Fund warned that governments must not allow “mediocre to become the new reality”, as data from three independent research agencies revealed emerging market (EM) economic growth had slipped to its lowest level since the 2009 slump.
EM economies have been affected by a mixture of things. Commodity driven countries such as Brazil and Russia have been hit by the shrinking oil price – although events in Ukraine have compounded issues for Russia – while the very strong dollar has exacerbated the outflow of capital from others.
Predictions from the three research agencies of what the average growth levels for the EM economies will be in the first quarter of this year, ranged from between 3.5% to 5% per year – the lowest levels since before 2009.
These low predictions followed weak jobs data in the US the week before, which revealed increased employment, but at about half the rate predicted by a Wall Street consensus.
On the same day Lagarde called for governments not to allow growth mediocrity to prevail, the US Treasury stepped up calls for big economies – including Europe and Japan – to boost demand as the global economy was becoming “increasingly unbalanced”.
Then on Friday, the UK’s Office for National statistics released data showing that Britain’s building sector had contracted by 0.9% in February. This was a surprise and was far below economist’s expectations of around 2.2% growth during the month.
All of this comes on the back of continued deflationary pressures in the eurozone (the UK’s ONS this morning revealed inflation remained at 0% last month), high levels of government debt and low oil prices.
So what can be done?
According to David Norton, head of investments at AES International, there are a few approaches to investing which may help you prepare for a potential crash, if indeed this is the path down which markets are headed.
“If there were to be a crash, the most obvious answer would be to leave all your money in cash. But, while you may not see the value of the cash plummet in the conventional sense – it will still be eroded by inflation, and bank security cannot be as relied upon today as it once was,” said Norton.
“Gold is the traditional safe haven when all else is uncertain. Other physical assets provide emotional security for investors, such as bullion, coins, bricks and mortar. Property can also generate a yield, making it easier to ride out a crash.
“However all of these carry their own risks, and you wouldn’t want to switch everything you have into just one of them.
“There is only one real way to remain invested and safeguard against a market crash, and that is to diversify your portfolio. Strategic asset allocation accounts for over 90% of risk, and will shelter your portfolio from depreciation if a bubble bursts. If equity markets fall, or property is hit, a well-diversified portfolio will safeguard your investments.
“Lastly, it is worth remembering that while crashes happen, so do recoveries. One option would be to do nothing, ride it out and wait. It would be an uncomfortable ride, and the recovery could take years - meaning you're not using your money at all, just waiting to get back to parity, but you should eventually get back to where you started.”
If you are concerned about your portfolio and would like to speak to a qualified AES financial adviser about it please click the link below.
About Simon Danaher
Simon Danaher previously worked for AES International, in marketing and communications.