Positioning for Uncertainty in Global Equities: Have we come too far, too fast?

  • While global equities approach their near pre-crisis all-time highs, investors are beginning to question whether we have come ‘too far, too fast’
  • Without a health solution in place, investors who have become increasingly sensitive to lingering uncertainty could consider a Low Volatility approach
  • SPDR has long offered US and eurozone Low Volatility exposures, and now we offer a Global Low Volatility approach for investors seeking to maximize geographic diversification to de-risk the portfolio

Global equities had experienced a significant drawdown in 2020, related to the global pandemic and the associated economic shutdown. However, last week Global equities (MSCI World) pulled within 1.5% of their pre-crisis all-time high (MXWO 2436.60 – 19 February 2020).1

We believe this recovery should encourage equity investors, especially as it comes following a Q2 earnings season that was meant to show the extreme negative impacts of the global COVID-19 pandemic on US corporations. Despite the encouragement, there are some notable features of the recovery and lingering uncertainties, which are preventing a full return to ‘risk-on’ and keeping large stockpiles of cash holdings on the sidelines, across all investor segments.

Since the MSCI World Index bottomed on 23 March 2020 (MXWO 1609.57), the index has rallied 49% as of 18 August 2020, recovering nearly all the ground lost at the end of Q1.2 This was the exact day the US Federal Reserve announced unlimited bond purchases.

While investors have welcomed the recovery in asset prices, it has been aided, in part, by unprecedented global stimulus from governments and central banks. Alongside the accommodative US Federal Reserve policy, the US government enacted the CARES Act on 27 March 2020 to support businesses and individuals through mechanisms such as the Paycheck Protection Program (“PPP”). Support for the PPP was further extended in April (an additional $321 billion in funding) and June (additional time and purpose to use funds).3 However, optimism of further support – such as the $3 trillion HEROES Act – is beginning to turn following the recovery of the stock market and with a looming election on the horizon.

A similar story is playing out across other major equity markets. Japan has seen a significant recovery, with the Nikkei 225 within 2% of its pre-crisis high (NKY 24,083.51 – 20 January 2020).4 The outliers are perhaps the eurozone, where decisive fiscal action is a bit lagging, and the United Kingdom, which is still dealing with a looming Brexit resolution.

Investors also remain cautiously optimistic about the prospect of global equities continuing to move higher, provided fiscal and monetary support remain and sentiment that a health solution is coming stays positive.

The relative opportunities for equity investors, at current valuations, are decreasing. As a result, cautious investors may begin to favour a Low Volatility approach. Investors seeking a diversified approach (see Figures 1 and 2) to remain long at these valuations could consider a Global Low Volatility allocation to position against the negative effects of lingering uncertainty.

How to play this theme

SPDR offers a suite of Low Volatility strategies that follow a simple and yet effective methodology. In one trade, investors can introduce a defensive posture to their global equity allocations using the SPDR® STOXX® Global Low Volatility UCITS ETF, which is now trading on the Euronext Amsterdam and the London Stock Exchange. To learn more about the fund, and to view full performance history, please follow the link below:

SPDR® STOXX® Global Low Volatility UCITS ETF

Figure 1: Country Exposure (STOXX® Global Low Risk Weighted Diversified 200 Index)

Figure 2: Industry Exposure (STOXX® Global Low Risk Weighted Diversified 200 Index)


European-Domiciled ETP Segment Flows (Top/Bottom 5,$mn)

European-Domiciled ETP Asset Category Flows ($mn)

Sources: Bloomberg Finance L.P., for the period 13-20 August 2020. Flows are as of date indicated and should not be relied upon as current thereafter.