Global equity markets have not reacted well to the advent of 2016, with volatility expected to become the new “normal” for stock markets and central banks shifting monetary policy.
The lack of corporate profit growth, the scary decline in oil, China’s sharp economic slowdown, high multiples and weakness in credit markets all suggest that further downside in stock markets is a distinct probability.
Perhaps the strongest argument is that the current bull market has been fueled by the Federal Reserve’s massive bond-buying programs, which have propped up equity market prices and stimulated growth in emerging markets.
With the Fed on course toward normalization, artificial growth in asset prices will unwind. With US interest rates rising, investors are increasingly likely to rotate out of risky emerging market assets and into safe havens.
In addition, the Chinese manufacturing sector is struggling with overcapacity after years of over-investment; its only option is to slash prices and flood the global marketplace. This disinflationary dynamic will hurt earnings and create a spillover effect for consumers, further weighing on stock prices. We are unsure whether this is the “big one,” but having a bit of protection in your portfolio never hurts.
I’ve built this theme using ETFs (Exchange-Traded Funds) with a broad sampling of large cap stocks globally. Using ETFs allows us to effectively short (or sell) stocks in order to benefit from price depreciation.