Investment │ Investment Tips

Introduction

In today’s digitally connected world, short-term market volatility can be more prevalent thanks to the immense amount of information at one’s fingertips. When dramatic sell-offs happen, it can be upsetting especially in the face of sensational headlines and negative media coverage, often challenging investors’ commitments to their long-term investment plans.
Now that we are arguably in the later stage of the business cycle, further periods of volatility may lie ahead. While there is no fool-proof method to navigate market ups and downs, the following tips can help.

1 . Keep calm

Short-term volatility is part and parcel of the investment journey

Markets can fluctuate depending on the news flow or expectations on valuations and corporate earnings. It is important to remember that volatility is to be expected from time to time in financial markets.
History does not necessarily repeat itself, but it does rhyme. Short-term volatility can occur at any time, but they do not necessarily derail the long-term growth in stock markets. Historically, significant recoveries occur following major setbacks including economic downturns and geopolitical events (Chart 1).
While headline-grabbing news can affect short-term market sentiment and lead to reductions in asset valuations, share prices should ultimately be driven by fundamentals over the long run. Therefore, investors should avoid panic selling during volatile periods, to avoid missing out any potential market recovery.

Chart 1: Financial markets have risen after the financial crisis over time

Source: Bloomberg, as at 31 December 2018. Index used: S&P500 Total Return Index.

Past performance is not an indication of future returns. The performance may go down as well as up.

2 . Remain invested

Long-term investing increases the chance of positive returns

When markets get rocky, it is tempting to exit the market to avoid further losses. However, those who focus on short-term market volatility may end up buying high and selling low. History has shown that financial markets go up in the long run despite short-term fluctuations (Chart 2).
Though markets do not always follow the same recovery paths, periods after corrections are often critical times to be exposed to the markets. Staying invested for longer periods tends to offer higher return potential.

Chart 2: The performance range of global equities over different time frames

Source: Bloomberg, as of 31 December 2018, calculated by rolling returns in USD within 1 year, 3 years, 5 years and 10 years timeframe. Index used: MSCI AC

World Total Return Index. Past performance is not an indication of future returns. The performance may go down as well as up.

3 . Stay diversified

Diversification can help achieve a smoother ride

Diversification basically means ‘don’t put all your eggs in one basket’. Different asset classes often perform differently under various market conditions (Chart 3).
By combining assets with different characteristics, the risks and performance of different investments are combined, thus lowering overall portfolio risk. That means, a lower return in one type of asset may be compensated by a gain in another.

Chart 3: The performance of each asset class varies over time

Source: Morningstar, HSBC Global Asset Management, data as at 31 December 2018. All returns in USD, total return.

Indices used: MSCI World Index; MSCI Emerging Market Equity; JPMorgan GBI-EM Global Diversified; Bloomberg Barclays Global Aggregate Corporate Bond Index; ICE Bank of America Merrill Lynch Emerging Market Bond Index; ICE Bank of America Merrill Lynch Global High Yield, Citi World Government Bond Index, FTSE EPPRA/NAREIT Listed Property Index, ICE LIBOR 3 Month

Bond indices are hedged, excluding emerging market government bond local currency (i.e. global government, global corporate, global high yield, emerging market government bond hard currency). Equities are unhedged.

Past performance is not an indication of future returns. The performance may go down as well as up.

4 . Stay alert

Market downturns may create opportunities

Don’t be passive in the face of market declines. When market sentiment is low, valuations tend to be driven down which provides investment opportunities (Chart 4). In rising markets, people tend to invest as they chase returns, while in declining markets people tend to sell. When investors overreact to market conditions, they may miss out some of the best-performing days.
Though no one can predict market movements, the times when ‘everyone’ is overwhelmingly negative often turns out to be the best times to invest.

Chart 4: Global equities trade cheaper during economic crises

Source: Bloomberg, MSCI AC World Daily Total Return Index, data as of 31 December 2018. Past performance is not an indication of future returns. The performance may go down as well as up.

Note: Price to book ratio (P/B Ratio) is a ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. A lower P/B ratio could mean that the stock is undervalued.

5 . Invest regularly

despite volatility

Investing regularly means continuous investment regardless of what is happening in the markets.
When investors make fixed regular investments, they buy more units when prices are low and less when prices are high. This will smooth out the investment journey and average out the price at which units are bought (Chart 5). It thus reduces the risk of investing a lump sum at the wrong time, particularly amid market volatility.
The longer the time frame for investment the better, because it allows more time for investments to grow (the compounding effect).

Chart 5: Dollar-cost averaging helps smooth the effects of market movements

The chart shows what happens to USD1,000 invested monthly vs a lump-sum investment of USD12,000. After a year, the total amount invested is the same, but the total shares purchased and the cumulative value are higher for monthly regular investment (dollar-cost averaging). Average cost per share for dollar-cost averaging is cheaper than lump-sum investment (USD0.90 vs USD1.00) in this hypothetical example. Please note that dollar-cost averaging may not always outperform lump-sum investment.

Source: HSBC Global Asset Management. This information is for illustrative purposes only and does not relate to any investments. The figures and rates are purely hypothetical.

WARNING: THE CONTENTS OF THIS DOCUMENT HAVE NOT BEEN REVIEWED BY ANY REGULATORY AUTHORITY IN HONG KONG OR ANY OTHER JURISDICTION. YOU ARE ADVISED TO EXERCISE CAUTION IN RELATION TO THE INVESTMENT AND THIS DOCUMENT. IF YOU ARE IN DOUBT ABOUT ANY OF THE CONTENTS OF THIS DOCUMENT, YOU SHOULD OBTAIN INDEPENDENT PROFESSIONAL ADVICE.

This document has been issued by The Hongkong and Shanghai Banking Corporation Limited (the "Bank") in the conduct of its regulated business in Hong Kong and may be distributed in other jurisdictions where its distribution is lawful. It is not intended for anyone other than the recipient. The contents of this document may not be reproduced or further distributed to any person or entity, whether in whole or in part, for any purpose. This document must not be distributed to the United States, Canada or Australia or to any other jurisdiction where its distribution is unlawful. All non-authorised reproduction or use of this document will be the responsibility of the user and may lead to legal proceedings.

This document has no contractual value and is not and should not be construed as an offer or the solicitation of an offer or a recommendation for the purchase or sale of any investment or subscribe for, or to participate in, any services. The Bank is not recommending or soliciting any action based on it.

The information stated and/or opinion(s) expressed in this document are provided by HSBC Global Asset Management Limited. We do not undertake any obligation to issue any further publications to you or update the contents of this document and such contents are subject to changes at any time without notice. They are expressed solely as general market information and/or commentary for general information purposes only and do not constitute investment advice or recommendation to buy or sell investments or guarantee of returns. The Bank has not been involved in the preparation of such information and opinion. The Bank makes no guarantee, representation or warranty and accepts no responsibility for the accuracy and/or completeness of the information and/or opinions contained in this document, including any third party information obtained from sources it believes to be reliable but which has not been independently verified. In no event will the Bank or HSBC Group be liable for any damages, losses or liabilities including without limitation, direct or indirect, special, incidental, consequential damages, losses or liabilities, in connection with your use of this document or your reliance on or use or inability to use the information contained in this document.

In case you have individual portfolios managed by HSBC Global Asset Management Limited, the views expressed in this document may not necessarily indicate current portfolios' composition. Individual portfolios managed by HSBC Global Asset Management Limited primarily reflect individual clients' objectives, risk preferences, time horizon, and market liquidity.

The information contained within this document has not been reviewed in the light of your personal circumstances. Please note that this information is neither intended to aid in decision making for legal, financial or other consulting questions, nor should it be the basis of any investment or other decisions. You should carefully consider whether any investment views and investment products are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. The investment decision is yours but you should not invest in any product unless the intermediary who sells it to you has explained to you that the product is suitable for you having regard to your financial situation, investment experience and investment objectives. The relevant product offering documents should be read for further details.

Some of the statements contained in this document may be considered forward-looking statements which provide current expectations or forecasts of future events. Such forward looking statements are not guarantees of future performance or events and involve risks and uncertainties. Such statements do not represent any one investment and are used for illustration purpose only. Customers are reminded that there can be no assurance that economic conditions described herein will remain in the future. Actual results may differ materially from those described in such forward-looking statements as a result of various factors. We can give no assurance that those expectations reflected in those forward-looking statements will prove to have been correct or come to fruition, and you are cautioned not to place undue reliance on such statements. We do not undertake any obligation to update the forward-looking statements contained herein, whether as a result of new information, future events or otherwise, or to update the reasons why actual results could differ from those projected in the forward-looking statements.

Investment involves risk. It is important to note that the capital value of investments and the income from them may go down as well as up and may become valueless and investors may not get back the amount originally invested. Past performance contained in this document is not a reliable indicator of future performance whilst any forecasts, projections and simulations contained herein should not be relied upon as an indication of future results. Past performance information may be out of date. For up-to-date information, please contact your Relationship Manager.

Investment in any market may be extremely volatile and subject to sudden fluctuations of varying magnitude due to a wide range of direct and indirect influences. Such characteristics can lead to considerable losses being incurred by those exposed to such markets. If an investment is withdrawn or terminated early, it may not return the full amount invested. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavourable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in certain jurisdictions. Narrowly focused investments and smaller companies typically exhibit higher volatility. There is no guarantee of positive trading performance. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. Economies in emerging markets generally are heavily dependent upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries/regions with which they trade. These economies also have been and may continue to be affected adversely by economic conditions in the countries/regions in which they trade. Mutual fund investments are subject to market risks. You should read all scheme related documents carefully.

Copyright © The Hongkong and Shanghai Banking Corporation Limited 2019. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited.

Issued by The Hongkong and Shanghai Banking Corporation Limited

Investment Tips

5 Tips to Handle Market Volatility

Start investing with HSBC