Martin Pelletier: Volatility has exposed vulnerabilities, but also promising trends for navigating uncertainty
Spring and Easter mark a period of change, renewal, and glimpses of growth. As the snow finally melts, buds on trees and cherry blossoms hint at what lies ahead. In the spirit of this season, my spring cleaning — prompted by the chaos of recent market storms — has revealed trends in the global markets, both risks and opportunities worth noting.
Falling U.S. dollar
As of April 15th, the U.S. dollar index, which measures the value of the U.S. dollar against a basket of six major foreign currencies, is down nearly nine per cent this year. This decline is half the magnitude of the 1985 Plaza Accord among the G-5 nations to depreciate the U.S. dollar relative to the Japanese yen and the German Deutschmark but is quickly approaching levels seen during the 2008 financial crisis and the 2022 inflation scare.
This trend is significant as it could accelerate the repatriation of capital back to foreign countries, where investors sell U.S. bonds and equity holdings to buy domestic assets in rising currencies. While it’s too soon to determine whether this trend will intensify, its potential to impede the growth of the U.S.’s capital-dependent, tech-heavy market is worth monitoring.
In addition, the Trump administration’s ability to service mounting debt amidst a sizable deficit is concerning, especially if traditional lenders such as China and Japan become reluctant to provide funding.
Historically, bonds have been a safe haven in market downturns, providing defined yields and rallying when interest rates drop. However, U.S. bond yields, particularly on the long end, remain stubbornly high due to concerns over the government’s massive financing needs. As a result, the classic 60/40 portfolio — 60 per cent stocks, 40 per cent bonds — has delivered just a two per cent annual return over the past 3 1/2 years. The reliability of bonds as downside protection seems increasingly questionable in this environment, creating a major challenge for more conservative investors.
Private equity: A word of caution
Private equity markets sometimes offer diversification opportunities, but the lack of mark-to-market valuation can create disconnects with publicly listed assets. Pension funds, as highlighted by the Financial Times, are offloading positions via private secondary markets, signalling underlying turbulence. Moreover, publicly listed private equity firms such as KKR & Co. Inc. and Blackstone Inc. have seen significant declines (20-25 per cent this year), suggesting challenges in this space. This underscores the importance of exercising caution in alternative investments.
Opportunities amid uncertainty
Structured note markets are presenting intriguing opportunities, driven by robust interest rates and high volatility. Levered boosters with solid downside barriers and annual auto-calls with double-digit coupons are particularly appealing.
Meanwhile, hedging strategies such as put protection have shielded portfolios from recent market sell-offs. As volatility persists, unwinding some of these hedges in the coming weeks could allow for capitalizing on potential rebounds.
Turning focus beyond the U.S. unlocks opportunities in global markets that are less affected by U.S.-centric dynamics. The heavily growth-oriented U.S. market has struggled in this environment, with high-growth stocks such as Apple Inc., Nvidia Corp., and Tesla Inc. showing extreme volatility. A globally diversified portfolio offers a chance to rebalance and explore regions better positioned for stability and growth.
Spring offers a chance for renewal, not just in nature but in investment strategies as well. While recent market storms have exposed vulnerabilities, they have also unveiled promising trends for navigating uncertainty. Whether it’s structured notes, hedging mechanisms, or global diversification, these approaches can help investors cultivate a resilient portfolio beyond the traditional portfolios of the past without onboarding more risk. Just as cherry blossoms bloom amid seasonal changes, opportunities emerge even in turbulent times.
