Systematic Risk of the Market is Overriding Everything

In the last few weeks, I have reduced my exposure to the stock market through my portfolio. In terms of position management, there has been a general reduction in the positions held in the portfolio.

What I can see is that the systematic risk of the market is overriding a lot of the individual fundamentals of stocks.

What is systematic risk? It is a risk that investors cannot diversify away, they cannot escape from it. When the market is so bearish and volatile, it tends to drive all the stocks down regardless of fundamentals.

Many investors are worried about their own money in funds and in their own trading positions. My message is simple, we are in a bearish market where systematic risk is overriding everything.

In this type of market, let’s call it bear market, it is very hard to make money from long-only strategies, because everything goes down. My own portfolio tends to reduce exposure dynamically relative to the risk in the market. Right now, it has very limited exposure.

When you look at the broad Australian market, our current level of drawdown is actually not all that bad. It is similar to the other crisis in the last 20 years, but it is still far from the depths of the Global Financial Crisis.

Could we get to a situation similar to the GFC? Perhaps, nobody knows. I personally don’t think things will get that bad.

What I do know is that investors need to manage their risk well in this environment. Reduce exposure without completely getting out of the market. Because you may miss the rebounds. Other than that, traders may be looking for shorts to take. But remember, downturns occur in the form of sharp stabs to the downside. I still believe in a sustainable strategy mostly in long positions and not short positions. It means I believe the market will recover and get back to an upward trend over time.

Ken Wangdong
Emerging Market Analyst, New Frontier Investor


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