Financial markets: Where to now?

Positioning portfolios to preserve previous gains and rebalancing them to reduce risk concentration.

It’s a new year, with new resolutions, and several investment strategies to be accomplished. However, the advent of the new year does not necessarily mean that the gains and losses of the previous year are ignored. For the general part of last year, Covid-19 and inflationary pressures were the major concerns for many investors across the globe.

While in the previous year most stock markets and several asset classes yielded sizeable gains, now that we have transitioned into the new year concerns that were predominantly set aside (on the back of global stimulus) have come to the fore and are dampening investor sentiment, thereby causing a flee to safety. Such concerns include the on-going high Covid infection rates, mounting inflationary pressures, the hawkish shift of central banks and the resulting rise in global yields. All these concerns pose a serious threat to our unrealised gains.

Following record highs in year-on-year inflation in most industrialised countries (US: 7.0%, UK: 5.4%, eurozone 5%, and South Africa: 5.9%), most central banks are left with no option but to hike interest rates to curtail these inflationary pressures. However, this has the consequence of hurting the lofty valuations of stocks (particularly technology stocks).

Several analysts envisage a market correction.

Already we have seen the yields of most government bonds starting to increase, with the US 10-year Treasury bond touching a yield of 1.90% (at time of writing). The increase in interest rates has a direct effect on the exchange rate, where the higher yields make the country’s assets more attractive, thereby increasing foreign capital inflows and with it, currency appreciation.

Having given a general outline of the macroeconomic landscape we are currently facing, the standing questions are:

Where to now? How do I position my portfolio to preserve previous gains? How do I rebalance my portfolio to reduce risk concentration?

Well, we at Global and Local Asset Management prefer to take the guesswork out of investing, by employing the ‘Avoid the Human Factor’ strategy (H-Factor).

Read: Investing using the Avoid the Human Factor strategy in 2021

The H-Factor is an actuarially based portfolio tool, developed by New York-based asset managers New Age Alpha, aimed at mitigating the risk of human behaviour in stock picking.

The H-Factor does not seek to generate returns by applying traditional methods such as the common smart beta and factor exposure funds we have all come to know. Instead, the H-Factor quantifies and avoids the risk of human biases in stock picking.

The strategy comprises developing probabilities which indicate the chance of a listed company not being able to achieve the growth implied by its current share price. The probability is calculated by using the only two things we know for sure about a listed company: the current share price and the profitability of a company as reported on in the published financial results. From these two data inputs, we can calculate the probability of the company being able to produce the results implied in the share price.

Using a probability-based approach to stock selection, we identify and avoid the risks present when share investors interpret vague and ambiguous information inherent in share prices in a systematically incorrect way.

In active and quantitative portfolio management there is much subjectivity in predicting the future value of a company which is why we prefer to employ the H-Factor.

Was this article by Mauro helpful?


Mauro Forlin

Global & Local Asset Management


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This would be great, if shares weren’t bought by humans. But alas, they are.

I agree with the strategy in the long term though. However, fluctuations based on human sentiment and emotive responses are certainly reflected in market price fluctuations as retail investors and institutions react in either a pre-emptive or opportunistic manner – all human attributes.

End of comments.



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