There are plenty of reasons to park a large proportion of your portfolio in cash and run for the hills (or the beach) but if you dig a little deeper the picture is more nuanced.
Yes we have ‘Brexit’, the US election, and various flashpoints of geopolitical instability around the world such as the migration crisis in Europe and North Korean sabre rattling in Asia, but from an investment point of view these could be more noise than signal.
Brexit is unlikely to hit stocks outside of the UK, the US election will create a lot of headlines but not trouble many domestic facing companies there, and the North Korea situation tends to always involve a lot of barking without any bite.
The VIX, generally accepted as the best measure of market volatility and by implication ‘fear’, has settled down notably over the past several weeks after the well document tumultuous start to 2016.
In fact, it has dropped down to levels not seen since before the China lead mini-crash in August.
If this relatively steady period does extend into the start of the summer then investors who had been planning to shut up shop might start to dip their toes into the market waters and put the kind of momentum into asset prices that seemed unlikely to materialise three or four weeks ago.
Markets experts of various stripes were rushing to proclaim 2016 as a year of volatility in January, and that may still transpire to be the case, but if a widespread sentiment that the rest of the year will be more benign takes hold, a lot of money that was being parked in ‘risk-off’ positioning could find its way back into the market as the weather heats up.
As well explained by JPMAM’s Alex Dryden here, there is also an argument to be made that pulling out money in May each year indiscriminately hits portfolio returns over the long run, and a more selective approach taking each year on its merits would be better advised.
For some it will simply be a case that they want to pay less attention to their portfolios while enjoying the summer in foreign parts, therefore taking risk off the table is a lifestyle choice rather than an investment decision.
But for those who want to maximise returns and do not mind keeping one eye on their asset allocation during the summer months this year could present more opportunity than most.
However, investors should also note that the recent stock market rally has resulted in global markets now trading above the pre-correction levels of December 2015. Fundamentally, nothing has changed in the meantime to support this stock market rally going forward. While this rally could of course continue for a while on the back of more inflows from retail investors and benign market sentiment, investors should realise the summer of 2016 could be a very hot one too.
