Asian market outlook: the beginning of the volatility cycle

By J.Fan

Federal Reserve has declared to leave the rates unchanged because of the instability of global economy and concerns over the inflation rates. Despite the uncertainties, there are signs of decline in unemployment rates (although this does not mean the quality of the jobs are up to par with what it used to be), which may lead to recovery in the housing market. However, the increase in market volatility over the past few months might only be the start of the volatility cycle. Adam Petryk, Head of Multi-Asset and Solutions at QS Investors (a wholly owned subsidiary of Legg Mason Global Asset Management), says despite the VIX Index was at a heightened level for the past month, the volatility is a sign of normalization, not a beginning of abnormal market movements.

Petryk emphasized that volatility does not equal to market downturn, it means there will be more fluctuation in the market. The market has been relatively calm in the past few years, as shown by the VIX Index which reaches the 20 points mark less than ten times over the past 5 years. Pertrk recommends the investors to diversify their risks by using a managed volatility strategy and a diversified multi-asset class portfolio. Drawing from previous experience, volatility cycle usually last over 3 years. “The best time to buy volatility strategy is right after a period of low volatility in the market, which means now is a good time for the investors to consider managed volatility strategy,” said Petryk. The managed volatility strategy aims to soften downward risks by generating dividend income to enhance returns.

Currently, the funds overweight utilities, telecommunications services, financials and consumer staples while underweight health care, materials, and industrials. Geographically, the global funds underweight the United States for foreign investors, China and Australia while overweight European and Asia market. The Asian countries overweighed by the global fund are Taiwan, Hong Kong, Singapore. In Taiwan, the funds overweight the semi-conductor sector even though they underweight technology in their global portfolio. Taiwan, interestingly, is driving force behind the overweight of technology sector in Asia.

Photo Courtesy of AP
Photo Courtesy of AP

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