How Investors Should Navigate a Volatile Market

Share

With markets becoming increasingly volatile this year, investors have started to question their investment decisions. The year 2018 has been a surprise to investors as there was an initial selloff period and then a strong rebound.

The question is, will an increased market volatility serve to be a problem for investors?

Even though volatility might not be favorable to investors as the risks associated with an investment go up, volatility fluctuations have been based on the current U.S. business cycle. The U.S. economy is currently in the later stages of a long period of expansion that followed the financial crisis of 2008. Until the economy started to get on a firm footing, the U.S. witnessed lower interest rates, an improving global economy, a Federal Reserve Bank that showed reluctance in pulling back on unconventional monetary policies and events like quantitative easing.

More recently, we have seen a pickup in global economic growth, which has started to raise concerns about inflation and what it could mean for the markets going forward. Theoretically, small amounts of inflation are healthy for the markets. However, a sudden spark in inflationary risk could prompt the Federal Reserve Bank to halt expansion and put a stop on economic growth by increasing the interest rates. This will in turn affect the global markets and corporate profitability for companies around the world. The small increase in volatility compliments the increase in uncertainty and this has started to come up during portfolio decision-making.

Taking into consideration the past market cycle short and medium terms, we can predict that the market will head lower because growth will eventually stall. Recession is a feature of the market and is also completely common throughout the world. When this downturn comes up, the markets will decline, and losses might be incurred. With the correct hedging strategies, it is likely that investors will be able to successfully jump from this potential hurdle.

Some worried investors might ask, should we sell? The answer to this question is dependent on how risk-adversity. Nobody knows when the next recession might occur because there is no definite answer. Predicting an event like the recession is complex and at times inaccurate. Investors who take an aggressive approach to their portfolio will play with the risk-return strategy embedded in their respective portfolios, but the ones who might be risk-averse could lose major returns if the recession never hits. Instead, hedging your portfolio through diversification might seem like an optimal approach.

Another perspective to think about might be your personal goals. If investors have achieved their monetary goals, it might make sense to take a less riskier approach. Sometimes hedging your portfolio and riding out the market jitters is a better idea than to liquidate your investments because of the small subtleties of how the market is designed with respect to the economy.

Municipal Bonds Performance

Share

The first quarter of 2018 has been disappointing for investors due to concerns about rising interest rates, inflation, and newly established tax rules. In February and March, municipal bond mutual funds only saw an investment of $268 million – a 92% drop from the five-year average. In the past three months, a majority of municipal bonds ETFs have returned between a negative 1%-2%. A bad quarter for municipal bonds has not occurred in the markets since Q1 2008. Yet, despite concerns about such congruence, much of the effect is caused by lower taxes leading to lower demand for tax-exempt bonds.

Due to worrying purchasing powers, investors are looking towards newly issued bonds rather than outstanding bonds (only until the price of such securities falls). From a perspective of the government, low bond prices have resulted in rising borrowing costs on the state and local level.

Yet, there also remains optimism in the market; a bipartisan bill, aimed at reducing the reach of Dodd-Frank would classify municipal debt as high-quality liquid assets, is expected to pass. The National Association of State Treasurers has attributed higher borrowing costs for the government to the lack of exclusion from the high-quality liquid assets designation. Currently, the municipal bond spread results in a ~85% yield of comparable Treasury bonds, a value higher than the historical average.

Keith Knutsson of Integrale Advisors commented, “Given that lots of uncertainty remain regarding the deregulation of Dodd-Frank, it makes municipal bonds too speculative for the average investor currently.”

The Future of Artificial Intelligence in the Insurance Industry

Share

Insurance companies are facing rapid tectonic shifts in their business operations as the financial environment changes and new technological advancements are made in the insurance industry. In such a competitive environment, many insurers are restricted to paper-based infrastructures and legacy IT implementation thus limiting their ability to make technological advancements. As new ideas and companies emerge in the industry, insurance companies will have to rely on artificial intelligence (AI) to meet practical uses. This creates a dynamic segue into the future of robotic process automation (RPA), a leading AI mechanism in the insurance industry.

RPA is a sophisticated “software” robot programmed to maintain everyday tasks that were previously handled by humans. The difference between the RPA technology versus a traditional robot is the fact that this software robot is programmed for tasks that are manual, rule-based and repetitive. In terms of being a true “game changer” in the insurance industry, robotic process automation has practical uses too. For example, it can be used in the transfer of coverage details from the product offering system to the policy system to prepare the issuance of the policy. In simpler terms, RPA efficiently connects multiple IT systems and mimics human actions at a user interface to speed up processes. The luxury of RPA is the fact that it compliments other software programs that companies currently use.

How will this impact the insurance industry?

With competition increasing in the industry, insurers are constantly placed in stressful situations to meet shareholder expectations and generate strong profits. Traditionally, insurers invest premiums paid by customers and generate strong returns. However, the current economic condition and volatility in the rates market has created strong headwind for many insurance companies. With major market volatility and competition from private brick and mortar insurance providers, prices have spiraled downwards. Not only that, but bigger tech giants like Google, Facebook and Amazon have accumulated tremendous amounts of data giving themselves the ability to offer customized insurance products based on specific customer profiles at competitive prices. To get an edge over these competitors, insurance companies need to find ways of creating tech-savvy products in the most efficient ways possible.

This is where the use of RPA comes into play for insurance companies facing a potential downturn in the future. With the ability to make quick decisions using RPA, customers can get bigger returns on their investments much faster. Not only that, but RPA helps insurance companies bring down the cost in operations and in turn provide competitive prices to its customers. Robotic process automation has the ability to re-shape the infrastructure of insurance companies by giving employees more time to focus on quality control instead of repetitive operational tasks.

The insurance sector is at a crossroad in terms of meeting the competitive challenges of technological advancements in the industry. RPA can quickly streamline costs, create an efficient operational network and add value for both insurers and the customers

Global Real Estate Market Status and Forecasts

Share

The Global Real Estate Market performed exceptionally well in 2017, with yields compressing and prime rents rising above consensus forecasts, rising 0.12% and 1.7% respectively, all while overall volumes increased by 13.2%, the highest level of real estate investment on record. The Industrial sector benefited from low comparable prices as well as new growth opportunities, factors that led to investment growth of 29.5% YOY. Asia captured 52% of the global market, setting a record for the highest share by any continent in recorded history. This influx was felt in the EMEA region where Asian capital increased 95% YOY to a total that remains below investment of North American Investors. Latin America markets are experiencing economic growth from primary and secondary effects of increasing commodity prices.

For 2018, real estate investors are expecting to leverage the positive impact of the technology industry. The growth of the share economy and big data may prove profitable for tech hubs and specialized second tier cities. Despite the continued rise of the “internet-age”, investors believe that location in prime real estate will be of profound importance.  While these locations are already mapped out in the developed world, emerging markets do not have such defined bounds. Gateway cities have proven as a potential common data point for highest growth. Overall, the benefits of economic momentum with risk of global shift in monetary policies are expected to balance results. Real estate will continue to operate as a tool against fears of inflation.

Keith Knutsson of Integrale Advisors commented, “The global economy is at an interesting point past the recession; the performance in 2018 will dictate the performance for supply and demand in the coming years.”

President Trump’s Tariff: Future Outlook & Market Volatility

Share

Last week, President Donald Trump announced a plan to set imposed tariffs on steel and aluminum imports further adding a layer of uncertainty on the future outlook of the markets. Tariffs of 25% on steel imports and 10% on aluminum imports will result in a price increase for multiple consumers and slow down growth for many businesses globally. This news could also play a major impact on foreign countries as they might also impose a similar tariff on U.S. exports.

President Trump’s announcement resulted in a decline in the stock market and backlash from global leaders who might have to face the burden on billions of dollars’ worth of U.S. imports. Shares of industrial companies and automakers face heavy headwinds with a sharp decline in share price going forward. The U.S. dollar continued to pull-back against the yen and euro as rumors about a potential trade war created a volatile environment according to Brad Sorensen, managing director of the Schwab Center for Financial Research.

“The market doesn’t like uncertainty. We don’t know if the tariffs will be targeted or widespread, what the foreign reaction will be, or whether this is an opening shot in a battle for tighter trade restrictions or a standalone action designed to send a message in ongoing trade negotiations.”

The biggest question has still been left unanswered because there is no concrete direction the market is headed due to the Cboe Volatility Index (VIX), a measure of market volatility expectations. With the recent news on tariffs and the Fed’s potential short-term rate hikes, the VIX has sparked to a level around 19.59 further implying a 30-point swing in either direction for the S&P 500.

As potential tariffs could impact the job market and change investment strategies going forward; only time will tell if tensions rise between the United States and its foreign trade partners.

BlackRock’s Efforts Do Not Go Unnoticed

Share

BlackRock is stepping up their intelligence research. The hedge fund is setting up a new center dedicated to research in artificial intelligence, placing an emphasis on interest among asset managers in how machine learning can revolutionize the investment industry. The world’s biggest investment group, with $6.3tn of assets under management, is establishing a lab for AI research in Palo Alto, California.

“Research in AI can enhance current investment strategies and accelerate efforts to bring the benefits of these technologies to the entirety of the investment industry” said Keith Knutsson of Integrale Advisors.”

AI has emerged as a topic of interest in the corporate world. Furthermore, the power of modern computers and expanding digital data have allowed for natural language processing and machine learning. Asset management teams are especially interested in enhancing AI as they try to improve the performance of their fund managers, automate back-office functions, and enhance their client outreach by analyzing large amounts of data. Some researchers believe that AI could ultimately replace human fund managers completely.

BlackRock seeks to be on the cutting edge of technology in the world of finance and the setting up of the AI lab, and an internal “Data Science Core” unit announced is part of the company’s technological advancement plan. Included in this plan is the use of investing machines to analyze traffic through corporate websites as an indicator to the future growth of a company. Another technology that the firm uses is text analysis to filter through transcripts of earnings calls, looking for signs of whether a management team is positive or negative about their company’s prospects.

Analyzing large amounts of data with ease opens a world of possibilities for generating alpha. However, traditional techniques must continue to be improved if a firm is to outperform their competitors. The new lab represents a deepening of those efforts to enhance AI in the financial field.

U.S Reported GDP Growth

Share

The United State Commerce Department posted GDP numbers at 2.6% on January 26th for Q4 2017. Those numbers missed Wall Street expectations of 3% but remain much better than the average 2% growth since the early 2000s, and the 1.5% increase in 2016.  The United States has not been able exceed the 3% mark for three quarters in a row for 13 years now, during the George W. Bush presidency. The growth was attributed due to increases in personal consumption expenditures, nonresidential and residential fixed investment, exports, and government spending on the local, state, and federal level. Limiting factors included reduced inventories and an increasing trade deficit; imports and exports rose 13.9% and 6.9% respectively, with rising oil prices having a profound impact on the import numbers.

Consumers and businesses powered the economy to a 2.6% rate of gross domestic product growth in the final three months of 2017. But declining inventories and a wider trade deficit kept the U.S. from hitting the 3% mark for the third quarter in a row for the first time in 13 years. Meanwhile, the Federal Reserve projects 2.5% growth for 2018, and other economists expect short-term growth of 3%. Factors such as an aging population and meager productivity growth remain key factors to subdue additional GDP growth.

Inflation rose 2.8% in the Q4, marking the highest quarterly increase since 2011. While 2.8% is above the 2% goal of the Federal Reserve, the year to year number was under 2%. Investors remain curious whether this development will draw comments from the Federal Reserve.

Equities have experienced strong quarterly results as well. Over 70% of S&P 500 companies beat EPS expectations in Q4, with an earnings growth rate of 12.3%.

Keith Knutsson of Integrale Advisors commented, “consumer confidence, according to the OECD, is at the fourth highest level since the 70s, the unemployment rate is incredibly low considering structural and frictional unemployment, and capital investments carry momentum with the new tax plan – the U.S is looking forward with much strength.”

Will London Remain the European Financial Capital?

Share

London is currently the financial center of Europe. However, with recent Brexit negotiations, this is now under threat. Amidst all this, the Bank of England is aiming to retain its status as one of Europe’s most powerful banks.

In December, the Bank of England said it will give commercial banks and big European investment an easy way to stay in London once Britain quits the European Union. It will offer them the same terms that big U.S. and Swiss banks get. It warned, however, that this setup will require deep cooperation between EU and U.K. regulators.

Brexit will affect the financial industry. The financial sectors is a big source of exports to Europe, representing 90% of Britain’s trade surplus in services with the Eurozone. It also provides more than a 10th of all tax revenue in the U.K.

Currently, London’s role in Europe relies on passporting. This allows any bank in one EU country to sell products and services in any other. That is what lets banks from all over the world use London as a base to serve European investors and companies.

The passporting regime will end with Brexit, and European legislators say it is unlikely to ever be replaced by a free-trade deal for services. The Bank of England’s decision can be seen as a gesture of goodwill. It does nothing to actually ensure that Europe will give banks in London future access to the EU.

If London preserves its financial hub status after Brexit is entirely implemented, this could stir up trouble for later. The U.S. and EU are already moving in a different direction by forcing foreign banks to set up onshore holding companies that require their own funding, capital, regulation.

This leaves Britain potentially at a disadvantage when banks fail. Allowing all big banks to operate as branches means that when financial trouble strikes, the U.K. will have no choice but to rely on the cooperation and forgiveness of overseas regulators.

Funds Seek Exposure to Cryptos

Share

It wasn’t until recently that hedge funds began paying attention to the market of digital currencies. Rollout of futures trading for cryptos and soaring prices have some large firms considering whether or not it is time to enter the market.

Funds are looking to profit by either buying bitcoin and other cryptocurrencies or by betting against them. Their entry and acceptance could provide more fuel to bitcoin’s already volatile trading. Quantbot Technologies Fund, Schonfeld Strategic Advisors , and others say they are working to understand how they might be able to profit from bitcoin.

“The market has gotten more interesting and the barrier of entry has fallen. Especially now that bitcoin futures are available” said Keith Knutsson of Integrale Advisors.

Some large firms and investors are already investing in bitcoin. Horizon Kinetics LLC, a firm that manages over $6 billion in hedge funds, mutual funds, and other products has been rather vocal about its recent purchases of bitcoin and other cryptocurrencies. One of the main reason for the exposure is the firm views the equity market as expensive, and the possible upside sizable for bitcoin as “enormous”.

Already, there are around 20 funds, managing a total of roughly $2 billion in assets, that predominantly trade cryptocurrencies. Some hedge-fund managers are becoming more willing to accept the risk of bitcoin after facing losses in traditional investing.  The introduction of bitcoin-based futures by CME Group and the Cboe Global Markets Inc. adds to the legitimacy of the currency for some big investors. Cryptocurrencies could be something to look into.

Manufacturing Expansion

Share

U.S. manufacturing activity slowed modestly for the second straight month in November, but the reading still shows a favorable factory sector. On Friday, the Supply Management Institute said its manufacturing index fell to 58.2 in November, but remained solidly in growth mode. A reading above 50 indicates activity is expanding across the factory sector, while a number below 50 signals contraction.

The slowdown of the sector’s expansion was driven by a decrease in inventories and a slower rate of growth in deliveries from export order and suppliers. Employment growth cooled just slightly. On the other hand, other components of the index showed strength for manufacturing. Overall new orders are rising at faster rate, and production increased.

Recent data shows that the manufacturing sector is on a steady growth path heading into 2018. Furthermore, factories dealing with disruptions due to the impacts of the hurricane season are now back to full production.

According to the U.S. Commerce Department, orders for durable goods are advancing this year at the best pace since 2014. This comes as a result of stronger investment in machinery and equipment by U.S. businesses. The recent recovery in the Energy sector has fueled manufacturing demand as well as demand for capital machinery. The consumer-price index increased 2% from a year earlier in October.

“Currently, demand is prevalent in all sectors. Therefore, the following manufacturing performance should carry forward into the new year” said Keith Knutsson of Integrale Advisors.