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Tactical positioning

From shock to crisis

Dr. Felix Brill, Chief Investment Officer VP Bank
Reading time: 4 Min
The broad equity indices in Europe and the US again lost 10% or more on Thursday. All investments that are somehow considered risky crashed. Five recommendations to navigate this market environment.

These days the search for safety proved more difficult than usual. In the bond markets, the buy-sell-spread in trading opened up enormously, a sign that there were more sellers than buyers. Even the US money market showed the first signs of stress, forcing the US Federal Reserve to pump additional liquidity into the market. Gold also came under pressure in the course of the day, losing 4% at times. This is a clear sign that more and more investors need to delever and liquidate parts of their portfolios.

In exceptional market situations, investors ask themselves what they should do now. We recommend:

  • Avoid situations in which you are forced to sell. Liquidity is limited in many asset classes during such periods of stress, and the price markdowns can therefore be enormous.
  • Maintain a broad diversification in the portfolio and, if possible, even broaden it. Regional aspects must also be taken into account
  • Hedge currency risks
  • Don't take on new credit risk
  • Take advantage of buying opportunities opportunistically, but always monitor closely your own risk budget.

We work along these recommendations in our asset management mandates. The first recommendation is the top priority. This is particularly important in the case of implementing changes to the portfolio. It may mean to delay making changes until a favourable window opens up. After yesterday's slump on the stock markets, for example, we believe that today is a good time to add stocks to the portfolio as decided by the investment committee this week.

A comparison with past corrections

This week will go down in the history books, that much is clear. On Wall Street the second largest loss since the so-called Black Monday in 1987 was recorded yesterday. And that comes on top of big falls on Monday and Wednesday. The losses since mid-February have already totalled over 30% in many stock markets. The EuroStoxx 50, for example, is down 34 %.

The average of all bear markets was exactly the 34% that has already been reached in Europe. A bear market is a loss from the peak of more than 20%. Averages, however, are such, that the extreme values are smoothened. But what makes the current correction outstanding is its speed.

Neither during the Great Depression of the 1930s nor in the financial crisis did the US stock markets fall so sharply in such a short time. In both cases, however, they only finished at just under minus 50 %. The low point was recorded after about 10 and 28 weeks respectively. The current sell-off has been going on for only four weeks. This shows that an extreme situation can still become more extreme.

At the same time, the past teaches us that even the biggest crises end at some point. In our view, central banks and governments around the world will do everything in their power to support the economy.

This document was produced by VP Bank AG (hereinafter: the Bank) and distributed by the companies of VP Bank Group. This document does not constitute an offer or an invitation to buy or sell financial instruments. The recommendations, assessments and statements it contains represent the personal opinions of the VP Bank AG analyst concerned as at the publication date stated in the document and may be changed at any time without advance notice. This document is based on information derived from sources that are believed to be reliable. Although the utmost care has been taken in producing this document and the assessments it contains, no warranty or guarantee can be given that its contents are entirely accurate and complete. In particular, the information in this document may not include all relevant information regarding the financial instruments referred to herein or their issuers.

Additional important information on the risks associated with the financial instruments described in this document, on the characteristics of VP Bank Group, on the treatment of conflicts of interest in connection with these financial instruments and on the distribution of this document can be found at notice


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