Crisis lessons: how investors should act during drawdown
Stock market analyst gives recommendations on how to protect your investments from risks in the current crisis
The events in Russia are many times more risky than the situation of eight years ago, and the reaction of the collective West and markets to the special operation In Ukraine, it is much tougher, says Sergey Pogudin, a trader, lecturer at Finam Group of Companies. In the author's column for Realnoe Vremya, the company's analyst tells the readers about what lessons the current crisis has taught Russian investors, what surprises they have encountered, and how they can try to protect their investments.
Few expected that the stock market crash would be so deep
“History repeats itself” is one of the most important postulates in investing. The events of recent months have taught many useful lessons, from which serious conclusions can be drawn, which will definitely be useful to investors in the future.
Undoubtedly, current events resemble the history of 2014, but original features have also emerged, and some of them are quite unexpected. What is happening now is many times more risky than the situation of eight years ago. Both the reaction of the collective West and the reaction of the markets to the current events is much tougher.
The package of economic sanctions imposed against Russia has become the largest ever applied in the world. For the first time in history, the Russian gold reserves have been blocked on foreign accounts, which no one expected. This dramatically increased the probability of default when servicing the national debt and collapsed the cost of OFZ. Understanding the long-term consequences for the Russian economy from the sanctions imposed, investors expected a stock market crash, but few expected it to be so deep. Stocks sank to levels that could only be expected in the event of a full-fledged global economic crisis. The temporary suspension of trading on Russian stock exchanges and the temporary ban on shorts are already familiar measures, by analogy with 2014, but no one expected a story with a complete ban on the turnover of depositary receipts of Russian companies on the London Stock Exchange. And the 12% tax on the purchase of the three leading currencies was also introduced for the first time. There is no need to even mention about the “trifle” such as the complete withdrawal of foreign investors from the Russian market (except for those locked in OFZ) against the background of previous news.
If you trade in London, trade in Shanghai as well
A pleasant surprise also happened — for the first time in the modern history of Russia, thanks to the measures taken by the Central Bank of the Russian Federation and the government, the ruble exchange rate quickly recovered after a powerful crisis depreciation. This factor, on the one hand, encourages investors, on the other hand, in a situation of a possible economic blockade of Russia, it causes concerns, since the high ruble exchange rate is unprofitable for the budget and will stifle exporters.
The lessons that can be learned from the current situation are mostly already well known, but some of them have become the most relevant. The situation with depository receipts has shown that working with only one type of instruments and only on one exchange platform is not only unreasonable, but also simply dangerous. Diversification by instruments and exchanges is necessary for the stability of investment portfolio. If you trade in London — then trade in Shanghai as well, if you trade receipts — then trade futures as well.
An important lesson, especially for novice investors, was the understanding that you can never relax in any market situation. All possible risks that may affect the effectiveness of investment should be taken into account in advance. The fact that the market can instantly change its behaviour leads to the understanding that it is impossible to work with lending without protective orders. The wave of margin calls, which could be seen by the behaviour of securities, showed that many investors ignored this rule. Timely closing of positions is an indicator of a trader's high culture.
Competent diversification of portfolios is needed
The sharply increased key rate on the ruble made the work on securities with a broker's loan suboptimal. Therefore, it becomes urgent to work with free exchange lending: futures and options.
The natural question is: is there any way to protect yourself from such situations in the future? We have already mentioned something briefly — now we are systematising the information. Current events have shown the need for competent diversification of portfolios by markets, instruments and working currencies. This is especially important in the light of possible negative consequences of the sanctions imposed on the ruble exchange rate. Working with instruments in the currencies other than the ruble smoothes currency risks in the portfolio and allows you to smooth out country risks, in our case, in Russia.
Only the Russian market fell heavily, but the American and European markets sank only within the framework of a working correction, from which they are already trying to go up, the same situation is being in the Chinese market. Having access to these markets and foreign assets in the portfolio, one can contain losses on the Russian market and get a good profit.
Choice of actions to reduce risks is quite wide
The general economic patterns that arise in the process of moving through the economic cycle can and should be used — to work with commodity and currency markets through futures, with oil, gold and other assets. The work with these markets will not be affected by a possible stagnation of the Russian stock market, which is important in the current situation. If there is no desire to take on increased risks when working with futures, then you can work with Gold ETFs, for example.
If investors are not interested in broad diversification of portfolios by markets and currencies, then in an alarming situation, to preserve the purchasing power of the portfolio, one can use paper positions hedging with ruble or stock indices futures.
As you can see, the choice of actions that reduce the risks of the portfolio is quite wide. It is important to know how to use them competently and act in advance, planning your activities for some time ahead. A few simple rules — and portfolio risks are reduced radically.
The author's opinion may not coincide with the position of the editorial board of Realnoe Vremya.