Fidelity MPF: Brexit stresses need for portfolio diversification to insulate against second half volatility
Hong Kong, 29 June 2016 –If there were any doubts 2016 is the year of volatility, the UK’s surprise vote to exit the European Union put that to bed. Global and Asian bond funds fared better than equities on this latest risk event, building on their 2016 outperformance among MPF funds with returns of 4.71% and 4.33% year-to-date1, respectively. The UK vote result has been negative for most funds, though MPF returns as a whole posted an average net decline 2.23%1. Renewed volatility has not helped equity markets across Greater China, Japan and Korea, pushing all three to the bottom of the MPF performance ladder, though market conditions suggest risk appetite for Asian equities may return in the second half of 2016.
“Challenging investment returns for MPF reflect a number of factors, including a collapse in commodity prices, regulatory misadventures in China, global acts of terrorism, and most recently uncertainties from UK referendum decision. While posting a first half loss of 4.53%1, the outlook of the global equity market remains challenging and may experience higher volatility ahead”, said Terrence Kan, Investment Director, Regional Institutional Business, Asia ex Japan, Fidelity International.
European equity funds declined by an average of 9.30%1 in the first half, second only to Japanese equity (-12.47%1) as the worst performing MPF category so far this year. Mr. Kan explained: “As an economy heavily reliant on trade, Japanese equities have been weighted down by slow global growth. European equities tumbled after the UK voted to leave the European Union. On 24 June, the European markets endured its largest single session loss in nearly eight years.”
Mitigating timing risks with steady investments
When stocks are volatile, it can be tempting to try to time the market and only enter a position when an asset declines by a large amount. This “buy low, sell high” investment approach can actually increase the risk of underperformance as investors could miss-time not only the bottom, but also the eventual rebound, according to KP Luk, Head of Hong Kong Defined Contributions Business, Fidelity International.
Mr. Luk elaborated: “To help MPF members avoid timing risk, MPF contributions are made with a dollar cost averaging approach. Members make monthly and fixed amount contributions to their MPF funds regardless of unit price. As a result, members naturally buy more units when the fund unit price drops. This disciplined investment approach also reduces the effects of short-term market volatility by averaging out the cost of fund units over time.
“The impact of dollar cost averaging is especially pronounced when markets are as volatile as they were in the first half of the year. The Hang Seng Index dropped 5.37%2 in the first five months of 2016; In contrast, a monthly pre-defined contribution to this same index delivered a 0.54%2 return over that same period of time. This trend holds trust when market turns around after a prolonged bear market as well. Looking at the Hang Seng Index from the eve of the financial crisis at end 2007 through to May 2016, a dollar cost averaging strategy would have outperformed a front-loaded single investment in the index by more than 20%2.”
Diversification is key in the second half 2016
Looking ahead, Fidelity MPF reminds members that volatility is likely to remain in the second half. Mr. Kan said: “Uncertainties surrounding the US rates path, the post-Brexit impact and the US presidential election will continue to drive volatility in global investment markets. A well-diversified portfolio across asset classes and regions can help MPF members spread their risk and capture growth opportunities.”
Mr. Kan commented: “Market reactions following the UK referendum have been discounting an UK outright exit from the European Union. However it remains uncertain on how the two-year exit process will take place. The global central banks’ response to market volatility, including the Fed’s rate hike path, is also critical to the capital markets outlook. Accommodative monetary policies will provide support to the Asian and Chinese markets.”
Mr. Luk concluded: “MPF is a long term financial preparation tool for retirement. Timing the markets based on short term market sentiment is not recommended. MPF members should construct their portfolios based on their own financial goals and risk tolerance levels.”
1/ Source: Morningstar (as of 24 June 2016), MPF categories as defined by Morningstar.
2/ Source: Bloomberg
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