The Risk Appetite – November 24, 2011
Equities are down across the planet, the risk trade is off after being on for October. This is the 24 hour global marketplace we live in fuelled by the continuous dissemination of news. We have geo-political tensions surrounding the Middle East; internal strife in Egypt, Syria, and now Bahrain; and the seemingly never ending European Sovereign debt crisis with now Greece, Portugal, Italy, Spain, and France facing downgrades and the risk of default.
The global markets react to headlines and with technology - stock, bond, and commodity markets react instantaneously to news. Analysts, market commentators and journalists all now throw around the “risk trade” moniker like it’s got a life of its own. Because markets are reacting simultaneously and we now live in a global market when the risk is on, stock markets seem to all go up and they all go down when the risk is off.
As an investor, the ability to move quickly trading in and out of sectors can improve returns dramatically. I’ve talked about the importance of being in the right sector. In 2010, Healthcare stocks were up 44.85%, and Materials stocks were up 36.54%, compared to Financials and Information Technology which were up 8.51% and 4.72% respectively.
In 2011, YTD as at the end of October, the situation is much different with the exception of Healthcare stocks which are again leading the pack up 14%, followed by Telecom stocks up 11% and Utilities which are essentially flat.
As sectors become opportunistic either positively or negatively, using ETFs, investors can capitalize. Overweighting certain sectors such as Gold, Healthcare, and Telecoms would have provided very good returns YTD. Underweighting sectors such as Info Tech, Energy, and Financials, would have mitigated losses in a portfolio. Being short those sectors would have been profitable to say the least.
Being in the right sector, not necessarily owning the best stocks enables investors to make macro decisions on which sectors to invest in and then use ETFs to tactically play those sectors. When the risk trade is on, hopefully you are positioned in the right ETFs and when the risk trade is off, you will be ready to react quickly.
Understanding what is happening in the global economy is essential and when combined with sound technical analysis, investors can make timely decisions and make sector specific investments using Exchange Traded funds.
Don Cromar CIM, FCSI