Winning The Trade War With A Diversification Strategy

The recent economic sabre-rattling between the US and China have upset the markets, with indexes shedding year-to-date gains as investors wake up to the reality that a full-blown trade war is a real possibility. So much so, that all major Emerging Market indexes have entered negative territory year to date.

Optically, the S&P 500 is up year-to-date at 3.5%, which is already outperforming the rest of the world index which is sitting at 0.12%. Coupled with a strengthening US Dollar, it does seem like even the threat of a trade war is reaping benefits for the American market relative to the rest of the world.

However, digging a little deeper, we discover that small caps are doing even better. The Russell 2000 index, an index comprised of the smallest 2000 stocks in the Russell 3000 index, maintained by FTSE Russell, a subsidiary of the London Stock Exchange Group, is up 9.99% year to date. Moreover, MSCI US Small Caps are up 8.36%. This suggests that investors expect that smaller companies with a stronger focus on the domestic economy will be able to weather the economic storm better than globally exposed MNC’s.

Locally, the STI Index went from being, at one point in 2018, the top-performing major Asian index, to down -3.75% in SGD terms, and -5.40% in USD terms. The swing in fortunes has been sharp, sudden and drastic.

Here at Providend, you won’t find us in a panic. In fact, we are feeling comfortable with our asset allocation as:

  1. Our Index + portfolios are tilted toward small caps
  2. Our portfolios typically track global market capitalisation so have a decent exposure to US equities
  3. The USD has strengthened against SGD

This is the power of diversification in action. We don’t simply peg ourselves to the local market, betting on a relatively small section of the world economy. We ensure that we are weighted correctly against the world. And in this case, with the US market as a whole, and small caps as a sector, outperforming most other indexes, we are confident in the asset allocation of our portfolios.

So, while the economic roller coaster is in full effect, sometimes, with the correct strategy in place, you can sit back, relax with a cup of coffee, comforted by the knowledge that you’ve done the right thing. And the only thing to do now is to plan for the more important things in life; the people and things you love.

This is an original article contributed by Providend’s Editorial Team.

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