Adding alternatives in times of volatility

Equity markets across the world took a tumble last month as a number of indicators signalled a possible recession looming, prompting sales in global stock markets. U.S. mortgage debt hit an all-time high [1], Germany’s GDP contracted in the second quarter [2], China’s industrial production growth hit a 17-year low in July [3] and its official manufacturing Purchasing Managers’ Index (PMI) contracted for the third straight month [4]. Furthermore, a number of major geopolitical risks have added to the volatility: the recent turmoil in Hong Kong, the looming of Brexit, the trade war between US and China and the crisis in the Gulf.

So far this month, the FTSE 100 is down by 6.4%, S&P500 is down by 4.5% and Germany’s main index, the DAX, is down by 5.6% [5].

Picture 1

Source: www.investing.com

All these helped fuel a rush for safe assets such as bonds and gold [6]. Indeed, the yield on two-year and 10-year US Treasury bonds inverted [7]; something we had not seen since June 2007. The UK bond yield curve also inverted for the first time since 2008 [8], while the yield gap between 10-year and 2-year German government bonds was at its tightest since the financial crisis [9]. Interestingly, since 2018 we also saw an increase in both new registrations of lenders on our peer-to-peer lending platform and also increased enquiries about lending on fixed-returns loans. This is a trend we have seen in the past when equity market volatility spikes.

Picture 2

Source: www.investing.com

Investment portfolios with a 60/40 allocation to stocks and bonds or other fixed-income assets used to be the rule of thumb. These portfolios did pretty well throughout the 80s and 90s. But in our opinion, the recent market volatility has highlighted that this approach to investing is no longer enough to meet long-term investment goals. Instead, a much broader approach should now be taken in order to achieve sustainable long-term growth and adding alternatives, including peer-to-peer loans, to a portfolio may help it withstand shifts in secular trends. Because alternative investments tend to behave differently than stocks and bonds (in technical terms, alternatives have a low correlation with stocks and bonds), adding them to a portfolio may provide broader diversification, lower volatility, enhance returns and increase income levels.

Peer-to-peer lending in particular has emerged over the past decade as a popular tool that enables investors to access a wide range of investment opportunities; it has been used by investors to try boost the return on their portfolio where they were being penalised by low interest rates. According to Brismo [10], the 1-year net return on UK peer-to-peer loans is nearly 4% p.a. while platforms such as Blend Network offer 8-12% return p.a. on property-secured loans.

Stay tuned and keep an eye on www.blendnetwork.com for more deals to come in very soon and #LendWithBlend

 

[1] Source: https://www.wsj.com/articles/u-s-mortgage-debt-hits-record-eclipsing-2008-peak-11565708431

[2] Source: https://edition.cnn.com/2019/08/14/business/germany-economy-gdp/index.html

[3] Source: https://www.euronews.com/2019/08/14/china-july-industrial-output-growth-falls-to-17-year-low-as-trade-war-escalates-retail-sales-disappoint

[4] Source: https://www.efe.com/efe/english/business/chinese-manufacturing-industry-contracts-for-3rd-straight-month/50000265-4034096

[5] Source: www.investing.com

[6] Source: https://www.wsj.com/articles/investors-rush-into-havens-as-growth-fears-persist-11566207002

[7] Source: https://www.marketwatch.com/story/2-year10-year-treasury-yield-curve-inverts-triggering-bond-market-recession-indicator-2019-08-14

[8] Source: https://uk.reuters.com/article/uk-britain-bonds/uk-yield-curve-inverts-for-first-time-since-2008-as-global-market-gloom-sets-in-idUKKCN1V41L8

[9] Source: https://www.reuters.com/article/eurozone-bonds/fresh-lows-for-germanys-bund-yield-as-powerhouse-economy-contracts-idUSL8N25A1VV

[10] Source: https://brismo.com/market-data/

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