BUILDING
PORTFOLIO
RESILIENCE

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We see two broad categories of market risks: known risks, like runaway inflation or the outcome of a major election, and ‘unknown risks’ – Black Swan events that cannot be anticipated by markets. The outbreak of the Covid-19 pandemic in 2020 was one notable example of an ‘unknown risk’, but the category spans other unpredictable events like large scale cyber or terrorist attacks and natural disasters, among others. So, how can investors position for the known and the unknown?

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any financial instrument or product or to adopt any investment strategy.

POSITIONING FOR KNOWN RISKS

Inflation has been in focus in 2021, as the global activity restart has taken hold and rising demand has met supply chain disruption. Looking ahead, we expect a higher inflation regime in the medium term – with a more muted response from central banks than in the past. We think that medium-term inflation is still an underappreciated risk, and advocate building inflation protection into portfolios through stocks and bonds.

POSITIONING FOR THE UNKNOWN

Investors may be able to manage downside risk through varied, adverse conditions by building all-weather resilience into their portfolios. Resilient portfolios take measured risk accounting for uncertainty, hold diverse exposures and adapt to changing market conditions.

Explore the tabs below for implementation ideas on how to build portfolio resilience for unknown risks through equities, fixed income, and commodities.

NAVIGATE OUR RANGE

For all-weather resilience in equities, we believe defensive factors and quality sectors may provide ballast in volatile markets, and also favour exposure to beneficiaries of long-term secular growth trends, like sustainability.

Source: RQA stress test of the full iShares product suite under growth slowdown and recession scenarios, September 2018.

1. Source: Index Insights analysis of ESG exposures in varying market scenarios: Sustainable indices: built for all weather?, March 2021.

References to specific investments are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such investments.

While the traditional role of government bonds as a source of portfolio ballast has diminished in recent years, exposure to the front end of the spectrum may still help boost resilience in risk-off markets. Investors looking to hedge against upside inflation risks may consider inflation-linked bonds.

Source: RQA stress test of the full iShares product suite under growth slowdown and recession scenarios, September 2018.

References to specific investments are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such investments.

Gold may boost all-weather resilience as a portfolio diversifier: the precious metal has near-zero correlation over the long term to global equities and a negative correlation to rates.

Source: RQA stress test of the full iShares product suite under growth slowdown and recession scenarios, September 2018.

References to specific investments are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such investments.