BUILDING DEFENCE

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.

Global economies have reopened considerably since peak lockdown, yet as we move into the colder winter months, concerns are mounting over the potential for further waves of coronavirus infections - and their economic impact. Meanwhile, geopolitical uncertainty is in focus, against the backdrop of the US presidential election, Brexit, and rising trade tensions. Amid heightened market volatility, investors have been looking for ways to build defence in their portfolios. Below, we break down two scenarios for economic shock: growth slowdown and stagflation.

Expand the sections below to find out which asset classes may outperform and which may underperform in the growth slowdown and stagflation scenarios.

 

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.

A growth slowdown

Equities
Fixed income
Commodities & alternatives
Derivatives
  • Outperform:

    Quality, Gold, Defensives (minimum volatility, utilities), FX hedged range, Safe-haven single countries (e.g. Switzerland, Japan), Property

  • Underperform:

    Cyclicals (e.g. financials and energy), Emerging market equities

  • Outperform:

    Ultrashort, Short duration, Short duration high yield, Inflation linkers, Floating rate notes

  • Underperform:

    Duration (also term structure plays), Spreads (investment grade, high yield)

  • Outperform:

    Gold

  • Underperform:

    Oil

  • Outperform:

    Volatility hedges (pockets of volatility that haven't been bid up)

Stagflation

Equities
Fixed income
Commodities & alternatives
Derivatives
  • Outperform:

    Defensives (Utilities, dividend growers, minimum volatility), Safe-haven single countries (e.g. Switzerland, Japan)

  • Underperform:

    Cyclicals (e.g. financials and energy), Value, momentum

  • Outperform:

    Duration (also term structure plays), Inflation linkers, Government bonds

  • Underperform:

    Spreads (investment grade, high yield), Short duration

  • Outperform:

    Gold

  • Underperform:

    Metals, Oil, Physical infrastructure

  • Outperform:

    Volatility hedges (pockets of volatility that haven't been bid up)


Source: RQA stress test conducted across full iShares product offering, Sep 2019