The synchronized global equities rebound comes with risk. Systematic risk remains highly elevated at 73%, implying that investors can’t count on global diversification. Any negative surprise, say weakness in China or a collapse in oil prices, would likely have global implications. Prudent asset allocation therefore, becomes key to building a robust portfolio.
Ideal flight to safety assets show reliable negative correlation to equities. Fig 1. shows Friday’s cross asset map. Red links to Gold, JPY, and US 20 Y+ Government bonds indicate a negative correlation to equity markets at the center of the network.
Fig. 1. Friday 11 March FNA Correlations cross asset map
US 20Y+ Government bonds ($TLT) have the strongest negative link to equities, with a -.71 correlation to US Financials ($XLF). JPY ranks 2nd with -.66 correlation to Financials. Gold ranks third with -.53 correlation to Chinese equities.
Fig. 2. 20y+ Gov’t bonds show strongest negative correlation to equities & negative systematic risk
Here’s a 3 minute video explaining these correlation dynamics.
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