global asset allocation portfolio can greatly cushion the market impact of the country where the epidemic is coming when a major epidemic comes

Back to this new crown virus epidemic, although it is still impossible to say when the inflection point of the epidemic is, the huge market shock has already occurred. As shown in the table above, within two weeks, only the global risk parity portfolio with a very small share of Chinese stocks recorded positive returns. However, even with the CSI 300, China-US core asset portfolios can still rely on the high degree of diversification of the investment portfolio. Only a retracement of just over 2% occurred in a panic sale.

In summary, a decentralized global asset allocation portfolio can greatly cushion the market impact of the country where the epidemic is coming when a major epidemic comes.

However, since most of the market shocks caused by the epidemic exist only in the short-term, how does the global asset allocation portfolio perform in a longer market cycle? The following are the results of back-testing the performance of the above investment portfolios in the 16 years from 2003 to 2019:

Although on the income side, each asset allocation portfolio is slightly inferior to the Chinese and US stock indexes, but on the risk side, each asset allocation portfolio has significantly reduced volatility and the maximum retracement. Therefore, the Sharpe ratio is much higher than the Chinese and US stock indexes. Holding a global asset allocation portfolio allows investors to more securely obtain returns across the bull-bear cycle.

In the face of the black swan brought about by a major epidemic, many people have suggested that the rotation of the stock assets within the stock assets can also play a role in resisting the impact of the epidemic on the market. Here, we also discuss the issue from the perspective of excess returns of the plate. Whether the medical plate that has benefited the most from the epidemic situation and the most injured optional consumer plate performed as expected in the three major epidemics.

As shown in the figure above, we used the China Medical Sector Index and China’s Optional Consumer Sector Index as research objects to analyze the trend of the cumulative excess returns of the two sectors on the CSI 300 Index. It can be seen that from mid-April to early May, the outbreak of the epidemic has hit the market the most. In the short term, the Chinese medical sector has indeed increased its excess returns to the broader market. However, as the epidemic subsided, its excess returns soon disappeared, even in Within half a year after the epidemic ended, there was a cliff-like decline; however, the optional consumer sector has a stable excess return on the broader market throughout the epidemic, which is not in line with people’s impression.

For the H1N1 epidemic, we analyze the plate rotation caused by the epidemic by comparing the cumulative excess income of the US Medical and Optional Consumer Sector Indexes with the S & P 500. Similar to the SARS epidemic, during the peak of the two outbreaks of the H1N1 epidemic, the excess income of the medical sector briefly increased significantly, and after the epidemic subsided, it also significantly underperformed the market; however, the US medical sector was in During the period, the excess returns were almost negative, while the excess returns of the US consumer sector continued to rise both during the outbreak and six months after the outbreak, only underperforming the market during the first peak of the outbreak.

The US medical and optional consumer sectors performed very differently during the Ebola outbreak. The medical sector has steadily outperformed the market since the peak of the epidemic, and its excess income has not declined even after the epidemic subsided and ended. In contrast, optional consumption underperformed the market during the entire epidemic period, but after the epidemic subsided, it ushered in a retaliatory rise.

However, regardless of the continued strength of the optional consumer sector in the SARS and H1N1 epidemics, or the medical sector’s substantial outperformance in the Ebola epidemic, its underlying driving logic still falls on the long-term fundamentals of the sector. Sudden outbreaks, even if the excess income of the medical sector surges in the short term, or optional consumption underperforms the market. When we lengthen the time, this short-term impact will tend to return to the mean.

Facing the sudden new crown epidemic, China has responded positively throughout the country, with a faster and stronger response than during the SARS period 17 years ago. However, in this outbreak, the economic situation at home and abroad is also more complicated. The central bank has released water. Recently, the prices of all risk assets have reversed in a V-shape. On the one hand, there is a depression in the industry, and on the other hand, the market index rises, coexisting magically.

Will it make up then? Instead of guessing things like this, it’s better to be honest about asset allocation.

The most famous preacher of the “Black Swan” repeatedly mentioned in the article is-Nassim Nicholas Taleb. Another book of the same type, “Grey Rhino”, points out that many of the causes of people’s mistakes are excessive merits, short-sightedness, short-sightedness, uneven distribution of resources, and underestimation and misjudgment of risks.

The book mentions that, for Africa, “the outbreak of the Ebola virus crisis is the same as that of many other gray rhino-type crises. It has all started with people’s resistance to denial and procrastination. The root of the problem is that Africa has no An effective health care system. The cause of the Ebola virus outbreak is not just a challenge to the medical community, administrative issues, upside-down reward and punishment systems, irrational resource allocation, and failure to respond to disease surveillance mechanisms; A series of problems, such as inertia hindering and fear-dominated decision-making processes; the lack of grass-roots organizations, cannot be ignored during the epidemic. ”

At the end of 2014, the World Health Organization estimated that the damage caused by the Ebola virus that caused more than 10,000 deaths was just the beginning. The economic losses to western African countries are about US $ 32 billion, most of which come from trade and economic activities. It is estimated that if a disease prevention and control system is established beforehand, the cost will only be half of the total cost of disaster management after the fact.

And our choice should not be limited to ‘after the fact that you spend a lot of money to remedy’ and ‘what you want to do in the future’. We had the opportunity to establish a priori mechanism. For the epidemic situation, it is an effective epidemic prevention mechanism that can respond at any time; for investors, an investment portfolio that can pass through bulls and bears and stably resist the invasion of various exotic black swans is our ex-ante mechanism.