Well the New Year’s here and global equity markets are not off to a great start. Most equity markets have recorded their worst start to a calendar year ever. And this comes on the back of calendar 2015 performances which in price terms were negative for most major equity market indices – and those that did record positive performances were mostly in the low single digit range.

Background to these recent difficulties

That age old enigma – China (and the associated effect that this is having on the resource sector slide) has been a major issue for markets along with a number of geopolitical concerns with North Korea and also the Saudi Arabia / Iran difficulties.

In regards to China, we were assessing this issue quite early. In June last year we wrote a thematic paper for our investors titled – MGD Wealth Portfolio Thematic Paper – The Next Asia Crisis. It detailed our view on the deteriorating balance sheet situation in China and the ramifications that this could have for a (then) skyrocketing Chinese equity market and fragile Chinese economy. As has been highlighted in our monthly and quarterly portfolio updates over the second half of 2015, we took decisive action in regards to some of our key investment sector concerns – and we are very pleased with the risk aware outcomes generated for our investors.

So has the recent market upheaval taken us by surprise?

Well, yes and no. Our investment thesis has increasingly been that we are now in the mature stage of the investment / credit cycle (the decision to taper monetary accommodation and the recent Fed move were the signposts we have entered this stage). Mature stage investment cycles can be typified by volatility shocks that are both more frequent and increasing in amplitude. August / September 2015 was the first taste of this volatility and it appears January 2016 is lining up the same way. We undertook significant work in early to mid 2015 to reposition aspects of the various portfolios to a more defensive footing and we are very pleased with these proactive steps taken.

What’s the wash-up for the portfolios?

Well, this is where our defensive investments have a chance to shine. Constructing a portfolio is a little like putting together a well-balanced sporting team – you need a good mix of both defensive players as well as attacking ones. The ‘team’ needs to take advantage of opportunities when things are going your way as well as being defensive when needed to preserve your gains when things are going against you. As is the case with all coaching jobs there is always fine-tuning to be done and we looked upon the August / September 2015 volatility shock as a good test run for our defensive line up. We made some subtle changes in response – even though our defensives did very well in preserving capital over the downturn (our losses were less than a quarter of those experienced by the ASX 200). Given this, we feel our defensive line up should place us in good stead for January 2016.

Continuing to work hard for our investors

We understand some investors find such periods of market instability and severe short term weakness disheartening or even frightening. Further, while we at MGD Wealth need to stay focused on these volatile short term market moves because such periods often produce the most interesting longer term opportunities, it is important investors don’t become overly focused on short term movements. Instead, the aim should be to keep an eye on longer term return targets and investment goals.

The following educational video links provide our investors with a general overview on our approach to managing capital during particularly challenging market periods. Preserving Capital During Difficult Market Conditions and Risk Aware Investing – Dynamic Asset Allocation.

Talk to your adviser

As is always the case, we encourage you to discuss any concerns with your client adviser. They are best placed to understand your individual situation and guide you through what can be a challenging situation.

Disclaimer: This publication contains general information only and is not intended to constitute financial product advice. Any information provided or conclusions made, whether express or implied, do not take into account the investment objectives, financial situation and particular needs of an investor. It should not be relied upon as a substitute for professional advice.