The Fall of Diversification

Please see below the latest ‘Chart of the Week’ from State Street Global Markets


This week, Timothy Graf, head of macro strategy EMEA at State Street Global Markets notes that many of the historically reliable portfolio diversification vehicles are starting to behave in new and unusual ways.

“One of the immediate causalities of the ongoing COVID-19 crisis is the seeming fall of traditional safe haven vehicles as sources of diversification. In times of extreme market turmoil, correlations between assets often rise sharply, but exposure to safe havens like gold and the Japanese yen (JPY) can diversify away some of this risk. This is not the case today. Over the last two weeks, the average pairwise correlations across global equities, US investment grade credit, gold and the JPY (vs USD) have experienced a larger spike than anything seen during the 2008 crisis. In that previous crisis, having long JPY exposure helped mitigate the losses of holding riskier assets and currencies, but recent price action has been an entirely different animal. With safe havens selling off riskier assets and the dollar gaining pre-eminence as the refuge of choice, JPY performance has been left significantly trailing.”


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