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Financial models could pose risks

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Investors should be cautious about relying on financial market models and forecasts while global markets recover from the impact of the COVID-19 pandemic.

Investors should be wary of relying too heavily on financial market models when making investment decisions in the wake of the coronavirus pandemic, an investment expert has said.

Fidelity International Asia-Pacific chief investment officer Paras Anand said investors should be cautious about financial forecasts and models while global markets were still recovering from the impact of COVID-19.

The extensive market uncertainty caused by the virus highlighted the limitations of basing investment decisions on the assumption that past attributes would continue into the future, he pointed out.

“We’ve seen over the last 10 years, and the last five years in particular, a growing interest in investment strategies or use of models to make predictions about the future,” Anand said.

“We think it is wise for investors to treat all models with a greater degree of caution because most models are based on the past being an effective guide to the future and I think we are in an environment where things like historical correlations become a poor guide to future correlations.”

Anand also highlighted the re-emergence of an ‘information edge’ as a result of past correlations breaking down, with investors now more likely to benefit from a detailed understanding of individual companies than they were before the pandemic.

“There’s this concept that’s quite well accepted that the information edge period is over; information is readily accessible and the requirement for companies to disclose high levels of information in a way that is universally accessible means that investors [are unlikely to] gain an edge by looking at this information,” he noted.

“One of the reasons I think the information edge is re-emerging is because we’ve been in a period where people have paid much more attention to the behaviour of securities and the behaviour of securities relative to each other, versus looking at the particular nature of companies that differentiate one from another.

“We’re [now] talking about this period, looking forward, where there’s simply no shortcut to doing one’s homework.”

Earlier this month, Schroders Australian fixed income and multi-asset head Simon Doyle warned investors could not afford to be complacent despite markets showing signs of recovery following the coronavirus pandemic.

In May, global fund manager Principal Global Investors noted the negative effect on share markets inflicted by the pandemic was unlikely to worsen, but investors should remain cautious about taking on more risk in their portfolios.

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