How to protect your portfolio in an equity selloff
The Rally
You are probably quite pleased with yourself. The markets have rallied and no doubt your selection of stocks and funds have moved higher with it.
The introduction of quantitative easing in Europe and Japan alongside continued easy monetary policy in the US and UK has fuelled equity markets over the past three years. Most major equity indices have consistently broken to fresh highs and portfolios have grown.
Most major stock indexes are within 5% of all time highs and haven’t suffered a major correction for years.
The markets have been spoon fed liquidity by central banks leading to complacency among investors who have forgotten that stock markets can go down.
The Fed
The Federal Reserve is on the verge of hiking its base interest rate, the fallout could be extremely serious for equity markets if there is the perception that Janet Yellen is withdrawing easy monetary policy before the economy is strong enough.
Take the example of the ‘taper tantrum’ in 2013 when then Federal Reserve Chairman, Ben Bernanke, uttered the word ‘taper.’
Equity markets collapsed, the FTSE 100 fell over 850 points in the space of a month.
Bernanke was referring to a reduction in the amount of bonds that would be purchased through the Federal Reserve’s so called ‘QE3’ programme.
In 2013 the mere suggestion of reducing the stimulus caused a market rout, this time the move will be to tighten the supply of money.
The Federal Reserve raising rates may be the catalyst for a market correction but there are various other events, which if materialise, could lead to a correction. A Chinese stock bubble, failure of Eurozone QE, a war in the Middle East, a Black Swan event or the Bank of England raising rates could all trigger a sharp downturn in markets.
The Sell Off
Markets hate uncertainty and uncertainty is bred from a lack of clarity and knowledge.
It is highly likely that most have not even considered the factors that will cause the next crash. It is also likely that those currently lacking a strategy to protect their wealth will take a long time to react.
Unfortunately when markets fall, they fall faster and further than most expect.
A good way of understanding stock markets is to think of them in terms of elevators and stairs.
Markets rise like long flight of winding stairs, and they fall like an elevator crashing down a shaft; they go down much quicker than they come up.
Needless to say it pays to be prepared for such an event.
Move into cash
Cash is king. In times of volatility, sometimes the best option is to liquidate the portfolio and await cheaper prices and higher stability.
Exchange Traded Funds
There are numerous Exchange Traded Funds that offer investors the opportunity to profit from a plunge in equity prices. These can be focussed on whole indexes or a selected basket of stocks.
Deutsche Bank offer DB X-Trackers FTSE 100 Short Daily ICITS ETF (LON:XUKS), designed to reflect the opposite movements of the FTSE 100 on a daily basis. This means that the share price of this ETF will rise if the FTSE 100 falls.
Some ETFs enable investors to gain downside ‘short’ exposure on a specific sector.
ProShares Short Oil & Gas (NYSE:DDG) tracks the Dow Jones U.S. Oil & Gas index which contains around 95 companies such ExxonMobil, Chevron and ConocoPhillips. If this basket of 95 shares is to fall, the price of ProShares Short Oil & Gas will rise.
If you hold a selection of global oil companies and don’t wish to sell, trading this ETF will provide a hedge.
For further details on ETFs, visit our Tips & Guides section and select an Exchange Traded Funds trading guide.
Contracts for Difference
Contracts for Difference (CFDs) give investors the ability to go short on individual shares or entire indexes. A popular market to trade is the FTSE 100. Depending on the broker you are given the opportunity to trade in contracts or lots which give you exposure to the underlying market.
For example, a contract may give you exposure where you make or lose £10 per 1 point of the index. If you open 1 contract at 7050 and it falls to 6950, a difference of 100 points, you could make £1000, but if the market rises to 7150, you could lose that £1000.
You can also short sell individual shares. When the market falls there are stocks that tend to move more quickly than the rest of the market, these are known as higher ‘beta’ stocks. Moreover depending on the reason for the sell-off, certain sectors will also lead the way down.
The catalyst for a downturn could be attributable to China for instance, mining companies are highly impacted by Chinese demand and could see a sharp downturn in such an event. Shorting companies like Anglo American, Rio Tinto or BHP Billiton could be a prudent decision in this situation.
Generally CFDs do not have an expiry date so you can keep them open for as long as you wish. CFDs do incur a small overnight financing charge which is around 3% +/- Libor. Commissions and spreads vary from broker to broker, our comparison table will give you more information.
Options
Put Options give investors the ability to profit in the case of a market downturn. Similar to CFDs, options are traded in contracts, however they are fundamentally different as they have expiry dates and strike prices.
Buying a put option is considered as an insurance policy by investors as you pay a ‘premium’ to protect your portfolio. The premium paid plus commissions is the total risk the investor will take on.
Please visit our Tips & Guides section to access an Options trading guide.
Diversify
Diversification is always key when making investments and having a broad range of asset classes that aren’t highly correlated will protect your overall portfolio in the case of an equity sell off. A portfolio that is spread across Bonds, Forex, Commodities as well as Equities will be far better than one solely in equities.
IMF: Spain to grow 3.1% this year
The IMF has increased Spain’s growth estimate to 3.1% for 2015. This is the second time the International Monetary Fund has made a favourable change to Spain’s growth in three months.
Mariano Rajoy has faced pressures domestically but has been successful in reigniting Spain’s economy.
“The recovery has gathered speed and job creation has accelerated, but the level of unemployment is still high” said the IMF in its report.
Spain’s government have pushed through a number of reforms that have successfully enabled Spain to produce growth levels that are adequate enough to put a dent it their high unemployment figures and boost consumer confidence.
“The reforms are making a difference. Labour market reforms and moderate wage growth have supported employment and helped Spain regain competitiveness lost during the pre-crisis boom” explains the IMF.
Rajoy will have to tackle negative domestic sentiment later this year if he wants to remain in power, the IMF report will do much to garner support from the financial community, the general public may need a little more persuading.
HSBC plc slashes 25,000 jobs
HSBC plc (LON:HSBA) has announced it will slash 25,000 jobs in an effort to cut costs and make the bank less complex. London’s largest listed bank who makes most of thier profit in Asia has said that it will also dispose of Turkish and Brazilian units.
HSBC has come under pressure from investors of late as it has been slow to streamline the business in the face of increased regulations and higher costs. Some say the move is too little too late.
“Slaughtering the staff is not necessarily the solution unless management makes the bank considerably less complex,” said James Antos, analyst at Mizuho Securities Asia.
Shares in HSBC initially trade lower in London but pushed higher after the first hour of trading.
The move aims to save $5 billion per year by 2017, however these savings will come with their own costs; it is expected that the savings exercise will require $4.5 billion over the next 3 years.
8,000 jobs will be cut from UK operations with many branches facing a lower level of staff. Much of the other cuts will come from global IT and back office functions.
Investment banking will also see job cuts, the cost of compliance is becoming cumbersome for global banks and many banks have already slashed investment banking units. HSBC has been slow to react to regulatory changes but today’s announcement is being welcome by some investors.
“The market is likely to respond positively on the move with investors having a much clearer idea of HSBC’s direction going forward,” said Steven Leung, a sales director at UOB Kay Hian in Hong Kong.
Shares in HSBC trade at 621.2p at 9:21am London time.
Turkey enters period of political instability
Turkey has been thrown into political instability following an indecisive general election. The current ruling AKP party suffered a plunge in support to 41% and now is being forced to cobble a coalition together.
The failure of AKP to secure a majority led to heavy losses in the Turkish Lira and caused a stock market rout. Turkey’s stock market was down over 8% at when it opened on Monday.
The uncertainty spilled over to European stock with the DAX, FTSE and CAC all suffering losses.
AKP have 45 days to form a coalition and are currently meeting in Ankara.
President Erdogan has been humbled by the losses and in an effort to avoid destabilising protests, has accepted the results.
“Our nation’s opinion is above everything else,” Erdogan said “I believe the results, which do not give the opportunity to any party to form a single-party government, will be assessed healthily and realistically by every party.”
Turkey suffered a number of blasts prior to the election which some say were meant to disrupt the democratic process. The explosions took place at a Kurdish rally who were campaigning for 10% of the votes to gain seats in parliament. The pro-Kurdish HDP party won 12% of votes and will have around 80 seats.
The shake up to Turkey’s political environment may be the source of investor woes for some time to come.
“In emerging markets, investors particularly like certainty and strong leadership and that is something that we are now really lacking in Turkey. Turkey is one of the fragile five and is in a difficult situation economically and so uncertainty like this is really the last thing it needs. The key question now is what the central bank will do in the light of this huge depreciation in the lira. There is certainly an argument for it to hike interest rates. In terms valuations, many assets indeed look very attractive now, especially as valuations have taken a beating. There will be a lot of investors picking through various companies trying to look for cheap opportunities” said David Stubbs, market strategist at JP Morgan Asset Management.
Quanta Group to raise £3m in Crowdstacker’s first investment
The new Peer-to-Peer lending platform, Crowdstacker, has opened its first crowdfunding project to investors. The City of London registered company is facilitating a £3m funding raising programme for Quanta Group.
Quanta Group specialise in buying and selling residential property, since 2006 they have completed over 500 deals. Their objective is to buy properties that are in need of refurbishment and dispose of them once work is complete. Quanta acquire the properties and undertake modernisation then sell the improved homes. They say their success stems from the short time frame they are able to turn the projects around.
Quanta are embarking on a crowdfunding capital raising project to expand their activities. Each investor’s cash will either be held in a bank account or put into a property development. This is a factor Quanta are promoting to illustrate the efficiency and security of their plans.
Quanta are planning to raise £3m, investors will receive 6.8% per year paid quarterly over 3 years. Individuals can invest as little as £700.
Risk Warning: Crowdfunding projects involve a level of risk that may not be suitable for all investors. Generally there isn’t is a secondary market for crowdfunding projects meaning that investments are illiquid and an investor may find it hard to dispose of the investment quickly. Please read full details of any crowdfunding project and ensure you understand the risk before partaking in a crowdfunding project. #Investaware
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Vietnam discussions escalate South China Sea dispute
The dispute over the South China Sea escalated this morning when it was reported that Vietnam has entered discussions with EU and US contractors for Western fighter jets and drones.
The dispute over the South China Sea escalated this morning when it was reported that Vietnam has entered discussions with EU and US contractors for Western fighter jets and drones.
Vietnam seeking to upgrade its air defences is the latest event in a long-standing territorial dispute over the South China Sea. China, Vietnam, the Phillipines, Taiwan and Malaysia all have claims to the area. Since January, China have been building artificial islands on submerged reefs, dredging up millions of tonnes of rock and sand from the sea floor and pumping it into the reef to form land. China took control of the one of the bigger reefs in 1988 after a battle with Vietnam, leaving 70 Vietnamese soldiers dead. Since then, China has avoided confrontation; however, with plans to build an air base long enough for fighter jets to take off on one of the new islands, it appears they are choosing now to strengthen their claim to the area.
Ian Storey, from Singapore’s Institute of South East Asian Studies believes that “Although Hanoi knows that its military will always be outnumbered and outgunned by China’s, a strong navy and air force provides it with a limited deterrence and, if push comes to shove, the ability to give China a bloody nose in battle.”
There have already been altercations between Vietnam and China; in May 2014, China put an oil rig in water claimed by Vietnam, sparking an international incident. Strengthening their defences is a move which will further militarise the dispute with Beijing.
By Miranda Wadham
Vodafone dispels merger rumours
Vodafone has revealed that it is in talks with Liberty Global over “selected asset swaps”, but are not discussing a full-blown merger.
The FTSE 100 mobile giant issued a statement to the stock exchange this morning after reports surfaced overnight that it was in discussions with the cable operator.
Rumours have long been rife about a possible merger between the two companies, as as fixed and mobile telecom markets and networks converge. The company confirmed in a statement that “ it is in the early stages of discussions with Liberty Global regarding a possible exchange of selected assets between the two companies.”
Vodafone did not specify which parts of the company and the assets that would be involved, continuing: “There is no certainty that any transaction will be agreed, nor is there certainty with respect to which assets will ultimately be involved”. Vodafone’s shares were down 2 percent at 243 pence by 0800 GMT (9:00 a.m.) following the statement, having risen 2 percent in earlier trade following media reports that the two companies were looking at a merger. The stock is still trading up 7 percent since May 19 when renewed speculation about a combination began.
by Miranda Wadham
Moneysupermarket and Zoopla fall on Ofgem investigation
A probe by the UK’s energy regulator has led shares in Moneysupermarket.com Group PLC (LON:MONY) and its rival Zoopla Property Group PLC (LON:ZPLA) becoming the worst performers in the FTSE All-Share index yesterday.
Moneysupermarket said: “Ofgem has opened an investigation into whether two or more companies providing a supporting service for the energy industry have breached competition law…Ofgem is gathering this information to establish whether to include the company as a subject of its investigation.” Ofgem had asked it for information as part of its investigation into “whether two or more companies providing a support service for the energy industry have breached competition law”.
Rival uSwitch, which has just been bought by online property website Zoopla in a deal worth up to £190 million, has received the same request.
Ofgem’s probe comes amid wider efforts by lawmakers and regulators’ to make the energy market more competitive and bring down prices. Price comparison websites such as Moneysupermarket and uSwitch have faced criticism recently for making it easier for consumers to switch to options that earn the companies a commission.
Moneysupermarket made the biggest drop on the on the mid-cap index, although Zoopla was not far behind, down 16p to 260p.
By Miranda Wadham
Greece misses IMF payment
Greece has become the first country in over three decades to defer a payment to the IMF, the last country to miss a payment was Zambia in the 1980s.
The Greeks have not technically defaulted and today’s event will not be classed as a credit event.
The motive behind the non-payment remains unclear, Greece has the money to pay the bills as well as a number of subsequent repayments; it is not case of not being able to pay but a conscious decision not to release funds.
One theory is that the indebted nation is attempting to broker a deal with creditors that will provide an alternative to economy shattering measures.
“We are looking forward to getting a deal as soon as possible,” said economy minster Stathakis in a BBC interview.
His apparent optimism maybe displaced as the Germans grow tired of Greek brinkmanship and point out the limited impact a ‘Grexit’ may have.
Markets reacted negatively to the news, the FTSE 100 trades down 07% at 6812 and the German DAX down 0.9% at 11243 at 10:10am London time.
Although markets were deep in the red, the fall was contained as investors stepped in, assured by the ECB’s bond buying package.
The rise of equity crowdfunding
The growth of Crowdfunding, an alternative source of funding for small businesses and startups, shows no sign of slowing down; according to a report from Cambridge university and Nesta, an innovation charity, it grew by 410% between 2012 and 2014.
Crowdfunding is essentially a process whereby which the public are given the opportunity to invest in an start up companies. There are now various online platforms that list these investment opportunities; the leaders include Crowdcube, SyndicateRoom and Seedrs.
Part of its attraction is that it makes investing more attainable – now, it is not just the so called ‘business angels’ who have the chance to put money in and profit from new ideas, but also the general public.
However, it’s not all ‘Dragon’s Den’ style moneymaking; it is important to note that most start-up companies fail, and therefore investors will lose their money. Investing money in start up businesses through crowdfunding is undoubtedly a risky option – especially for anyone without a knowledge of the industry. The UK’s financial watchdog gave a stark warning to anyone considering investing in equity crowdfunding that it is “very likely that you will lose all your money”, and most crowdfunding opportunities fall outside the Financial Services Compensation scheme. Furthermore, anyone investing must be prepared to be in it for the long haul. It generally takes between 3-7 years for a company to sink or swim, so it may be some years before an investor sees any significant returns.
Despite these pitfalls, crowdfunding can be a good option for people wishing to invest relatively small amounts of money – £10 is a common minimum stake. Similarly, it seems to attract people who are confused by traditional options and therefore have avoided it in the past – 62 per cent of investors interviewed by Nesta said they had no previous experience of investing.
The safest way to invest is a portfolio approach – putting £100 into 100 start ups rather than £100,000 in one spreads the risk and ensures a safer investment. Equally, it is an attractive route for businesses in need of money in difficult times when banks aren’t lending freely.
Whilst crowdfunding is not yet regulated by an authority, the Crowdfunding Association has set up a code of practice to which every platform must adhere to if it is a member, which goes some way to providing regulation and safety. Crowdfunding platforms that have signed up have the black UK Crowdfunding Association’s logo on their website.
Undoubtedly the biggest draw that crowdfunding has is the satisfaction of seeing an idea you believe in becoming real. Rather than having money sitting in the bank, people love the idea of investing in local businesses and ideas that they feel passionate about; it is this that is the driving force behind crowdfunding’s surging popularity.
According to Nesta, crowdfunding raised $1.5 billion for businesses in 2011, and in 2012 one project raised over $1 million; these figures look set to continue to growing. For more information on new crowdfunding investment opportunities, keep checking the crowdfunding page of our website.
By Miranda Wadham