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Diversification alone is not enough

For many investors, classic portfolio diversification is a proven strategy for balancing the portfolio in a volatile market environment and protecting it from stronger downturns. But market volatility has increased significantly again and is currently at its highest level since 2015. However, diversification is no longer sufficient to enable investors to respond to new market challenges with appropriate speed and, above all, flexibility – even outside trading hours.

Nicky Maan, CEO Spectrum Markets:

”Market volatility is back, and as strong as it was last seen in late summer 2015. This is reflected in the volatility index Vix, which indicates the expected fluctuation of the US stock market index S&P 500 over the next 30 days, and which passed the 40-point mark last week. For now, we expect that the volatility will remain and may even tend to increase. Because uncertainty is also reflected in falling stock prices and rising gold prices. At over 1,600 US dollars this is as high as it was last at the beginning of 2013, while stock indices have fallen significantly: the German leading index Dax by almost eleven per cent compared to the previous month, the S&P 500 by almost ten per cent and the Japanese Nikkei by more than eight per cent (as at 2 March).

In order to protect oneself from losses like these, we do not believe that the classic strategy of 'diversification' is adequate anymore. ;One reason for this is that bonds with a good rating - the usual protection against volatility in the portfolio - have for some time now been performing only in the lower single-digit or even negative range. Also, stock picking of equities and bonds may not be sufficient to respond to current market conditions. Because despite the high volatility, many assets are overvalued, that can be shortened through derivatives.

In our opinion, investors should not let trading hours limit their trading, as they will miss out on potential. We are therefore convinced that out-of-hours trading is especially important in highly volatile markets – because volatility can be used to buy and sell. Investors therefore should not be limited to the trading hours of one or a few exchanges. Especially in volatile times, market participants need to be able to react around the clock – they need flexibility. The fact that out-of-hours trading is growing in line with the increasing volatility is shown by a look at last week's trading. During the 24th and the 28th of February 3.8 million securitized derivatives have been traded out of hours. The out of hours trading volume has, thus, more than tripled compared to the last full week of January.  The high level of activity is not surprising, because how strongly prices can fluctuate during off-exchange trading hours is illustrated by the example of the Nikkei index, which lost 1.3 percent between 28 February and 2 March 2020.”

1 On Spectrum Markets

About Spectrum Markets

Spectrum Markets is the trading name of Spectrum MTF Operator GmbH. Headquartered in Frankfurt am Main, Germany, it is a pan-European trading venue for structured derivatives, offering a new way of dealing for the European retail market. The platform is designed to allow banks and brokers and their retail clients 24/5 trading services based on a transparent order book including pre- and post-trade information. Spectrum Markets' multilateral trading facility already offers a wide range of 'turbo24' products on indices, currencies and commodities and will be extended to other product classes in the near future. Please find further information under spectrum-markets.com

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E-Mail: SpectrumMarketsDACH@fticonsutling.com