From Morningstar:

Investors are navigating risk in today’s volatile market. Instead of predicting, they prepare. Market sentiment is greatly affected by risk perception, but these challenges are also opportunities. Investors must focus on long-term strategies and not be swayed by short-term fluctuations. Harnessing the power of behavioral science is crucial in maneuvering through the landscape of economic and geopolitical risks.

Market uncertainties and negative surprises are daunting, but a well-calibrated portfolio can weather shocks. In fact, price dislocations from external shocks can be viewed as opportunities. For example, during the Covid-19 pandemic, global equities crashed, but recovered remarkably, showing the resilience of the market.

Not every external shock follows the path of the Covid-19 pandemic. Some impair cash flows, while others may result from misjudged portfolio sizing or incorrectly understood fundamentals of assets. It’s nearly impossible to predict both the risk and market impact, making ongoing fundamental asset-class analysis and careful portfolio construction essential in managing risks.

Entering 2024, external risks exist, but they present as much opportunity as loss potential. Uncertainty surrounds these potential risks, and having a robustly-constructed portfolio that considers the full range of outcomes is crucial. Valuation risk is often overlooked, but it is a real problem that should be considered in portfolio construction.

Market gains in 2023 were driven by a handful of large-cap US technology companies, which have high valuations and need significant growth to deliver on market expectations. In contrast, markets like China equities are priced for a story of despair, leaving room for potential opportunities. Fundamentals matter, and having a valuation buffer or margin of safety is key in the years ahead.

Uncertainty surrounds markets like China, but scenario testing can help determine positioning in these markets, acknowledging the uncertainty while managing risks. Valuations can shift the risk to reward in an investor’s favor, and where headline risks are plentiful, tomorrow’s golden opportunities might be found.

Patience and perspective are crucial in the world of investing. Understanding what is already priced in and how markets have adjusted is essential in making informed decisions. Every risk presents an opportunity, and a consistent approach can help navigate through new challenges in 2024.



Read more: How to Approach Investment Risk in 2024