Hedge your bets in bearish market

Yasmine Raso

Senior Journalist, Financial Newswire

24 May 2023

The time is now to hedge investments against a market crash according to AXA Investment Managers’ (AXA IM’s) Chief Investment Officer, Core Investments, Chris Iggo, with volatility sitting at its lowest levels of the year.

Iggo maintained that while volatility is a core part of resilience in investing, certain aspects of the investment environment that “profit from higher trading volumes, wider bid-offer spreads and volatility” actively attempt to paint a picture of “impending doom”.

“Higher volatility tends to be triggered by unforeseen news, or the actualisation of an unwelcome scenario,” he said.

“The threat of a US default [is] an event that might cause panic, but a softish US economic landing, the continued easing of inflation, and a peak and plateau for global policy rates close to their current levels is a well-established scenario, not one that should herald a tumult.”

Iggo also highlighted a surge in the total return from the S&P 500 belonging to information technology (IT) stocks, which account for 26.7 per cent of the market capitalisation of the index. Enjoying a total return for the year to date of 28 per cent and accounting for 7.5 per cent of the ten per cent total return of the index, IT hardware, semiconductor and software companies have paved the way.

“By contrast, last year’s best-performing sector – Energy – is down 8.5% and Banks are down over 10%. Instead of thinking there is something wrong with the overall market being led by dynamic, technology-focused growth stocks, I would argue it is a cause for optimism,” he said.

“It is surely better for the longer-term growth outlook for equity returns to be concentrated in companies that have the capacity to add to economy-wide productivity gains and advances in healthcare – such as artificial intelligence (AI) – than for them to merely represent an economic rent to fossil fuel extraction and distribution activities.”

Despite such optimism, Iggo said he remains wary, with the prevailing economic forecast still a recession in the US and small and mid-cap stocks underperforming, indicating more problems than solutions for the US economy.

“These problems could filter up at some stage. Or technology might have reduced its beta to GDP given the structural tailwinds coming from drivers like the energy transition, reshoring, and spending along the entire AI value chain (hardware, software development, user applications),” he said.

“There is a long way to go in terms of introducing and exploiting machine learning and AI in multiple sectors across the global economy. It has the potential to boost productivity and will generate growth and investment.

“It is hard not to be bullish on technology over the long-term as a result. Indeed, I believe AI – together with the energy transition and huge strides being made in biotechnology – provide lots for growth-focused equity investors to be excited about.”