The equities market and stock exchange traded funds face a number of potential hurdles toward the end of the year that could trigger greater volatility for investment portfolios.
On the recent webcast (available on-demand), Elections and the Fed: How to Prepare Your Portfolios, James Butterfill, Head of Research and Investment Strategy for ETF Securities, pointed to increased populism, including high inequality, low economic and wage growth, and increasing cultural diversity, as a leading factor in social unrest that could cause market headaches.
For instance, Butterfill looked at heightened inequality as a result of increased quantitative easing.
“QE has been very beneficial for equities and bonds, which only the relatively wealthy have access to,” Butterfill said.
Countries have experienced increasing cultural diversity, which have caused some negative feedback in Europe and the U.S. For instance, the ongoing Syrian civil war has displaced millions, triggering a rise in populist parties and momentum for the so-called Brexit in the United Kingdom.
In the U.S., investors are facing a contentious election season and a potential Federal Reserve interest rate hike in December.
Consequently, global traders have turned toward more defensive and safe-haven plays to hedge the multitude of risks. For instance, the uncertainty created by the U.S. presidential elections has been supportive of gold, and political and policy uncertainty has been supportive of defensive assets, Butterfill said.
SEE MORE: Precious Metals ETFs Still Popular as Risk Management Tools
Stephen Blumenthal, CEO, Chief Investment Officer & Portfolio Manager for Capital Management Group, also looked at the U.S. equities market and warned of high valuations, which puts investors at greater risk over the short-term. The P/E 10 ratios – a valuation measure applied to broad equity indices that uses real per-share earnings over a 10-year period – showed equity valuations are at the 94.1 percentile, or just short of the 95% at the 2007 peak. Consequently, Blumenthal believes that markets are more at risk of a pullback, projecting U.S. large caps to show real returns of -3.1% over the next seven years.
The bond market is not providing investors with much value either after a three decade bull market. Blumenthal pointed out that 33% of global government bonds are trading with yields below 0% and 71% of global government bonds have yields below 1%. With yields already depressed, bond markets are more likely to weaken and yields rise.
“There is no way bonds can repeat what they have done over the last 30 years,” Blumenthal said.
Consequently, with equity and fixed-income valuations elevated, Stan Kiang, Director of Strategic Partnerships at ETF Securities, argued that investors should consider alternative assets with low correlations to traditional assets to hedge an investment portfolio, such as hard assets like precious metals.
In a survey of financial advisors on the webcast, 40% of respondents said they held commodity ETFs. Looking ahead toward the next six months, 32% say they will increase allocation toward commodity ETFs.
Investors can gain exposure precious metals through a number of physically backed ETF options, including ETFS Physical Swiss Gold Shares (NYSEArca: SGOL), ETFS Physical Silver Shares (NYSEArca: SIVR), ETFS Physical Platinum Shares (NYSEArca: PPLT) and ETFS Physical Palladium Shares (NYSEArca: PALL). ETF investors can also use the ETFS Physical Precious Metals Basket Shares (NYSEArca: GLTR) as a catch-all of all four precious metals.
Financial advisors who are interested in learning more about potential actions in response to fourth quarter hurdles can watch the webcast here on demand.