Anxious Investors Try to Hedge Against a Big Selloff, Even as Good Times Roll
June 26 2017 - 8:48PM
Dow Jones News
By Ira Iosebashvili
Stock volatility is near an all-time low and corporate profits
have bounced back from a year ago, but investors are increasingly
moving to protect themselves from big swings in financial
markets.
Long-term U.S. government bond yields, which move opposite to
price, fell to fresh lows for this year on Monday, the latest sign
of investors' skepticism about economic growth. Meanwhile, utility
stocks, often a refuge for nervous investors, have rallied this
year, with another move up Monday helping to lift the broader
market.
Other signs of anxiety abound: A measure that shows expectations
there will be a big move in Wall Street's fear gauge, the CBOE
Volatility index or VIX, rose to an all-time high this month. The
VIX -- which offers a reading on investor expectations for
turbulence -- this month has been hovering near an all-time low.
The cost of insuring against a drop in the S&P 500 has climbed
steadily since the beginning of the year. And currencies typically
considered havens, such as the Swiss franc, have appreciated
against the dollar since last month.
So far this month, investors have pulled $235 million from the
two largest exchange-traded funds that profit from declining
volatility, on track to be the biggest monthly outflow since
November, according to FactSet.
The moves illustrate a bind ensnaring many investors. Stocks
have soared to records this year, even as anxiety mounts over a
cluster of issues that could derail the rally. Those include fears
that a mistimed interest-rate increase by the Federal Reserve could
dent economic growth, an accelerating drop in oil prices could hurt
wagers on emerging markets, or China's economy could slow, with
consequences beyond its borders.
Although money managers are loath to sit out a market rally,
many have opted to increase their allocations to investments that
would take the edge off a sharp decline in markets.
Erik Knutzen, chief investment officer for multiasset-class
portfolios at Neuberger Berman, which manages $267 billion, has
recently trimmed his exposure to assets that have soared in price,
such as U.S. large-capitalization stocks, concerned that lofty
valuations could take a hit if there's a threat to global growth.
Mr. Knutzen is also selling put options on stocks, allowing him to
buffer his portfolio from a decline in equities while still
maintaining market exposure.
"There's a lot of anxiety about where to put money to work," he
said. "We know the VIX won't stay low forever."
Some investors worry the Fed's pace of interest-rate increases
will further slow a U.S. recovery that appears to have shifted into
low gear. While the Fed's decision earlier this month to raise
rates was widely expected, many investors were surprised that Fed
Chairwoman Janet Yellen gave little weight to a series of weak
inflation readings and indicated the central bank remains on track
to tighten monetary policy for a third time this year.
Stocks fell an average of 7.4% in the six months after the Fed
raised rates during a quarter in which GDP growth was 1.2% or
below, according to data from UBS Group AG that analyzes three
decades of Fed policy.
Some wariness is already apparent in the bond market, several
analysts said. The yield premium investors demand to hold the
benchmark 10-year U.S. Treasury note relative to the two-year note
shrank this month to the smallest since September, approaching a
2007 low. A falling premium is known as a flattening yield curve
and typically happens when worries rise that economic momentum is
slowing.
"The bond market is already pricing in a Fed policy mistake,"
said David Woo, head of global interest rates and foreign exchange
at Bank of America Merrill Lynch.
While riskier assets such as emerging markets are rising on
hopes that a global recovery is sparking long absent inflation,
"the bond market believes that rates will go up and
inflation...will get crushed," Mr. Woo said.
He is also worried that a recent drop in oil prices will rout
investors from emerging-market trades that have delivered big gains
this year. The Russian ruble, which tends to move with oil prices,
is down about 3.7% this month. Mr. Woo is advising his clients to
buy the Japanese yen, a popular haven for investors during
turbulent times. The yen has strengthened around 2% from its May
lows against the dollar.
Timothy Graf, head of macro strategy EMEA at State Street Global
Markets, which manages $2.56 trillion, is using an options strategy
that would benefit if a bout of uncertainty caused sharp declines
in comparatively volatile major currencies such as the Australian
and New Zealand dollars.
A Chinese economic slowdown is clients' top concern, according
to a poll his firm recently conducted. Moody's Investors Service
cut China's sovereign credit rating for the first time in nearly
three decades last month, even as Beijing has intensified a
campaign to rein in risky investment and financing practices that
pose a threat to the world's second-largest economy.
Even though risky assets have lately performed well, "there is a
desire to hedge," Mr. Graf said. "Investors are trying to guess
where the next crisis will come from."
Write to Ira Iosebashvili at ira.iosebashvili@wsj.com
(END) Dow Jones Newswires
June 26, 2017 20:33 ET (00:33 GMT)
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