A combination of macroeconomic factors caused a wave of volatility to sweep through global markets during the latter half of 2018, none of which show any signs of easing early in 2019.
The unpredictability of the Trump administration, rising global interest rates, a strengthening US dollar, international trade tensions between China and the US, falling oil prices and signs of a slowing Chinese economy have created a litany of reasons for investors to feel nervous about a potential bear market.
Taking their cue from US tech giants like Apple, Amazon and Netflix, local tech growth stocks with high valuations have been hit especially hard. Since reaching 52-week highs back in late August or early September, market darlings like Afterpay Touch Group Limited (ASX:APT), Appen Limited (ASX:APX) and WiseTech Global Limited (ASX:WTC) have all suffered high double digit losses.
Even traditionally defensive healthcare stocks have been hurt by the global rout in equities. Blue-chip stocks Cochlear Limited (ASX:COH) and CSL Limited (ASX:CSL) are both nearly 20% off their September highs.
Blue-chip miners with Chinese exposure have had a subdued start to 2019, driven by weakening factory activity across Asia coupled with ongoing trade tensions between China and the US.
In these times of turbulence there are a few approaches you can take. If you have made some strong gains in any of your holdings, you could seize this opportunity to de-risk your portfolio by taking some profits off the table. On the other hand, if liquidity isn’t a concern and you take a longer-term – and possibly more optimistic – view of the market, now might be a good time to think about accumulating shares in solid growth companies.
The current climate could provide good buying opportunities for tech companies like WiseTech and Altium Limited (ASX:ALU) both of which have high rates of recurring revenues to help them ride out an economic downturn. Similarly, highly-differentiated, high-margin healthcare companies like Cochlear and CSL as well as ResMed (ASX:RMD) may offer great upside potential for longer-term investors at their current deflated prices.
However, if you’re more concerned about reducing volatility in your portfolio, another option might be an inverse ETF. These are portfolios of stocks that trade on the ASX like regular shares, but are specifically designed to do the exact opposite of their benchmark index.
An example is Betashares Australian Equities Bear Hedge Fund (ASX:BEAR) which aims to generate returns which are negatively correlated with the S&P/ASX 200. Since the beginning of September, the BEAR Hedge Fund has risen close to 12%. This is very close to the loss on the S&P/ASX 200 over the same time period.
This shows the downside protection an ETF can provide, especially if you hold a diversified portfolio of blue-chip stocks that tends to be closely correlated with movements in the broader market. It will also limit your potential upside, as the value of the ETF will drop as your other investments rise. However, if you anticipate periods of increased market volatility or even a possible crash, an inverse ETF can help you sleep a bit more soundly at night.
Motley Fool contributor Rhys Brock owns shares of AFTERPAY T FPO, Cochlear Ltd., Altium and WiseTech Global. The Motley Fool Australia owns shares of AFTERPAY T FPO, Altium, Appen Ltd, and WiseTech Global. The Motley Fool Australia has recommended Cochlear Ltd. and ResMed Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.