Investors need to position portfolios more defensively for more share volatility in 2025  

From

Simon Arraj

Investors should be positioning their portfolios to include more defensive investments in what could be a more volatile year for shares in 2025 after a sharp drop in share prices in the US overnight and on the Australian Stock Exchange yesterday, according to Simon Arraj, Founder and Responsible Manager of Vado Private.

The Dow Jones Industrial Average (DJIA) fell more than 1,100 points and the S&P 500 dropped 2.9% after the US Federal Reserve signalled it might keep interest rates higher than investors expected in 2025. The DJIA index fell for the 10th straight session, its longest losing streak in five decades, after the US Fed disappointed investors by signalling just two more cuts next year.

The VIX Index, a common measure of share market volatility, surged  74% overnight, to its second highest level this year. The US dollar also increased  to a two-year high amid the risk-off sentiment.

According to Mr Arraj, share markets might experience even more volatility next year and investors should be reallocating to more defensive assets to protect their portfolios.

“The complexities of a second Trump administration and changes to global trade relationships could further dent share markets in 2025. If inflation reemerges under a Trump presidency, we may not see the expected interest rate cuts from the US Federal Reserve, which could set back share markets. The risk of recession too still lingers in Australia if the central bank decides to leave interest rates higher for longer,” he said.

“Share markets are vulnerable here and in the US, where high valuations expose investors to a correction in markets.

“Market consensus expects earnings growth in 2025 to be low for Australian banks and moderate for ASX 200 listed companies, so shares look expensive at current valuations. As a result, investors may need to consider rebalancing portfolios with a greater allocation to defensive assets such as private credit to protect their portfolios against greater volatility and to preserve capital,” he said.

Private credit, a form of fixed income linked to real estate and corporate lending, can provide attractive yields with lower volatility. “For income-seeking investors, private credit investments can deliver attractive yields around 8-10% per annum, significantly higher than typical yields on shares or property,” said Mr Arraj.

Private credit assets have historically demonstrated lower volatility of returns compared to shares and bonds and are therefore considered defensive, according to research from the IMF. Both the US Fed and Reserve Bank of Australia have given the private credit sector a cautious stamp of approval, stating it provides funding to businesses where needed and that the financial risks associated with the sector are relatively low compared to other debt markets.

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