Investors taking risk averse strategies to hedge against market volatility

The risk of future market volatility is in the sights of most American investors, who fear further disruptive impact on their investment portfolios.

Earlier this week, Charlie McElligott, cross-asset strategist at Nomura Securities, warned that the post-Fed stock rally could fuel 'ugly market events' with an uptick in hedging — while protecting individual investors — may leave options dealers short gamma, forcing them to sell more to stay balanced in a sharp market drop.

More than half of respondents to a new survey of investors by Allianz Life said they have made changes towards a more conservative or less-risky strategy in reponse to recent market turbulence, rising to 58% among Millennials compared to 46% of Gen Xers and 41% of Boomers.

As well as reducing risk, most respondents (59%) also indicated that they are taking defensive action to protect their portfolios from market volatility, including almost seven in ten Millennials versus six in ten Gen Xers and less than five in ten Boomers.

The US presiedntial election is a key risk factor with almost three quarters of those taking part in the research citing this as a potential disruptor while around half fear a market crash is ahead.

A roundtable event held by the Association of Investment Companies Tuesday also highlighted concern about the election, although not necessarily long term.

Felise Agranoff, co-manager of JPMorgan American Investment Trust believes US econoic fundamentals will remain supportive.

“Whilst the US presidential election may spark some market jitters, due to uncertainty regarding the winner’s domestic political priorities and their stance on various geopolitical situations, the economy appears to be on a sound footing and should be supported as we enter a cycle of interest rate cuts,” she commented, adding that irrespective of the election outcome the approach to equities remains “high-conviction stocks and invest in quality businesses with good management teams and strong balance sheets.”

Agranoff pointed to risk from a slowing labor market in some sectors, if it broadens out.

“However, with economic growth solid, unemployment low, most of the journey back to 2% inflation completed, and rate cuts underway, the US economy should continue to provide a rising tide to support most investment boats for the rest of this year and into 2025,” she added.

INFLATION RISK

The spectre of inflation has become slightly less of a worry for investors, the Allianz Life study shows.

Although two thirds (66%) of respondents still think it will get worse in the next 12 months, this is down from 71% who thought so in the second quarter of 2024.

Fear often drives investors to take professional advice and this appears to be the case now with 61% saying they have recently reached out to an advisor or other financial professional, or plan to, and 73% say they would stop working with their professional if they could not help them reduce exposure to market volatility.

“Short-term fluctuations in the market are normal,” LaVigne noted. “Your long-term financial strategy should be resilient from temporary turbulence. Working with a financial professional can help you to create a strategy that addresses the risk of market volatility to keep you on track.”