Last week’s more than 4% decline in the S&P 500 was not unusual. In the current quarter alone, the large cap index moved by a similar amount seven times. How do professional investors trade in such a volatile environment and what are they buying? Hedging betting Speaking to CNBC’s “Pro Talks,” Chief Investment Officer Neil Veitch of SVM Asset Management said he manages risk by being open to any strategy that offers the “best return.” A “very, very short term” option, according to Veitch, is an inverse volatility ETF (exchange-traded fund). These ETFs, such as the ProShares Short VIX Short-Term Futures ETF and the Short VIX Futures ETF, allow investors to bet on a stable market in times of volatility. This is done by effectively shorting the VIX, a measure of volatility expectation based on S&P 500 Index options. Some ETFs even use leverage, or debt, to amplify returns. . Veitch, who manages around £200m ($213m) across three funds, also suggests another option for hedging against equities in the medium term: US Treasury bonds. Historically, bond prices tend to rise when stocks fall. They are considered safer than owning stocks. “Owning 4% two-year US Treasuries is as good a place as any for your money at this particular point,” he added. Rampant inflation pushed the interest rate, or yield, on short-term US government debt to 4.13% from 0.76% at the start of the year. Veitch believes the market is currently reacting to “increasingly hawkish rhetoric” from the Federal Reserve and other central banks as they attempt to rein in inflation. “The path of inflation and how central banks react to it determines the path of markets in the short, short and medium term,” he said. Finding Value If this is the environment, how does Veitch find value in stocks and what does he buy? The chief investment officer highlighted a handful of stocks that have been “hammered” by concerns over consumer confidence. “With stocks down and in many cases down 50%,” said Veitch, who also manages the SVM World Equity Fund, “they are starting to look more attractive.” Micron Veitch revealed that it sold shares of chipmaker Micron Technology earlier this year. Shares of the semiconductor company have fallen 48% to $50 since January. The fund manager said the stock would be “interesting” if it fell to around $40 a share going forward. “I suspect Micron’s next earnings update will be poor,” he said. “It will be very interesting to see how the market reacts if the stock drops aggressively. I expect this sell to be bought.” JD Sports Veitch said JD Sports, a London-listed global sportswear retailer, has a “very interesting mid-term story” as the company expands in the US and Europe targeting the “premium” segment. . The Manchester, England-based company, which operates more than 2,000 stores in 19 countries, has seen its stock fall more than 50% since its recent peak in November last year. SVM’s UK Growth Fund has allocated 2.8% of its portfolio to JD Sports. The fund manager said some retail stocks are likely to rise next year if inflation falls significantly. “There’s no point in picking retailers across the board. We have to try to understand what the mid-term dynamics are, what their long-term earnings potential is,” he added.
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