Anxieties are rising as the market turmoil enters a new phase of uncertainty. The palpable market nervousness is understandable because, as blatantly observed in 2008, a sharp rise in volatility translates into a sharp rise in correlations which is the equivalent of modern portfolio theory's worst nightmare as it results in a breakdown of what would otherwise be a robust theory of how to ensure stable returns in an environment of controlled risk over the long term.
The keyword here is "long term" because, thankfully, volatility spikes tend to occur over relatively short periods of time and therefore, it is hoped, cancel out their negative impact over the longer term.
So how does the theory stack up in the real world? Our next newsletter will attempt to answer that question but, in the meantime, the intriguing graph above, known as a "radar" graph, summarizes our thoughts regarding the various asset classes. Reading it is relatively straight forward. Each point in this heptagonal shape refers to an asset class or a sub asset class. Each asset class is given a sentiment score of one to three with one being bearish, two, neutral, and three, bullish. An asset and/or sub asset class with a bearish outlook would be marked at the center of the heptagon whilst one with a bullish outlook would be marked at the outer boundary.
