You're facing a sudden market downturn. How should you prioritize client demands?

One way to tell whether you are in a bubble BEFORE the Market downturn, is to measure the Cost of Capital prevailing in that Market. There are many ways of doing that, and no general answer fits all Markets. The Cost of Capital would bundle together the Cost of Debt and the Price of Risk: in other words, a Debt/Bond Market and an Insurance Market. A Debt Market would have a "current yield", the short-term interest cost prevailing, to hold a security. And the Insurance Market would have an "insurance premium" (often a CDS, or an Option), which tell you the Cost of Insurance. Together, they will tell you the Cost of Capital, which has a relationship with other securities, other asset classes (like Gold), or with itself over time.

Another way to ANTICIPATE the said "sudden market downturn" is measure the number of Momentum traders in the Market, and track their behaviour. You will see the preponderance of new metrics. Remember that during the Real Estate Boom of 2007, "land bank" was the measure of fundamentals for Real Estate companies. DLF, the market leader, subsequently fell 93%. In the IT boom, it was the PEG ratio: you took short-term growth and put that into the Terminal Value, expecting such growth rates to Infinity. This strange behaviour demands a single question: "why is the King naked?". But nobody asks it. However, this Time is never different. It's easy to ask such questions and stick to the discipline. So that you don't have to REACT, if you PROACT.

When facing a market downturn, it’s crucial to prioritize assessing client risk exposure as a first step. Review their portfolios to understand vulnerability to volatility and identify any high-risk positions. This involves evaluating asset allocations against each client's investment horizon, risk tolerance, and financial objectives. By carefully assessing risk, you can offer targeted advice aimed at mitigating potential losses while positioning clients to capitalize on future recovery. Additionally, keep clients informed with clear, concise communication about the current market situation and any recommended adjustments to their strategies. This proactive approach helps to manage client expectations and maintain their confidence.

When facing a sudden market downturn, prioritizing client demands requires a clear assessment of risks. Begin by evaluating the potential impact of the downturn on each client’s portfolio and objectives. Identify which clients are most exposed to market volatility and which demands are most urgent. Focus on addressing the highest risks first, offering tailored advice and solutions to mitigate potential losses. By systematically assessing risks, you can allocate your time and resources effectively, ensuring that you address the most critical client needs during the downturn.

Mantenha uma comunicação aberta e transparente com os clientes sobre os prazos e as limitações atuais. Isso ajuda a gerenciar expectativas e a construir confiança ,reter seus principais clientes e formadores de opinião.

To manage client demands during a sudden market downturn, clear communication is crucial. Begin by transparently explaining the situation, outlining how the downturn impacts their investments. Provide straightforward, actionable advice tailored to their specific concerns. Regular updates on market conditions and your strategy to protect their interests help maintain trust. Clear communication reassures clients, reduces panic, and ensures they understand the rationale behind your decisions during volatile times.

Mantenha uma comunicação aberta com os clientes sobre a situação do mercado e como você está abordando suas demandas. Isso pode ajudar a fortalecer a confiança e a lealdade.

Mantenha a calma nesta situação. Seja claro na comunicação com o cliente e entenda quais são os anseios do seu cliente. Comunicar de forma clara, sem jargões financeiros podem ajudar muito ao cliente se manter mais tranquilo

Se comunique com o cliente de forma clara, trazendo exemplos, facilitando o seu entendimento do momento vivido. É muito importante "falar língua" do cliente.

Rebalancing portfolios is crucial for investment banks to prioritize client's demands. Bankers should start with assessing clients' portfolios to understand the exposure and alignment with the clients' risk tolerance. The strategy hinges on selling overperforming assets to book profits and purchasing undervalued securities with future growth potential. Therefore, continuous monitoring of the market and client portfolios is essential to make timely adjustments. Additionally, proactive communication is important in being transparent with the client regarding the market conditions to avoid any dissatisfaction or panic amongst the clients.

There are 2 dimensions on which portfolios need to be rebalanced as the Market resets to a new level (a.k.a. Sets a new Cost of Capital). One is horizontally, with respect to other stocks (market-wide), and the other is vertically, with respect to its own past valuations. For a given cash flow trajectory, assuming no change, any new level in the stock, should be evaluated against its Long-Period Averages (LPA). If a stock is "cheap" both horizontally and vertically, then it is likely to be deserving of an allocation. The reverse is also true, and they can be done at different times. The interim is the Cash Holding: it should be active, waiting for the next allocation. So that's how you allocate to a stock for a given "average" Market.

Estes momentos são ótimos geradores de oportunidade. Para proteger seu cliente e se preparar para elas é importante buscar por liquidez no portfólio de seu cliente. Aproveite o momento oportuno para fazer o rebalanceamento.

Classifique os clientes com base em seu valor estratégico para a empresa. Priorize aqueles que são mais lucrativos, têm potencial de crescimento ou são essenciais para a sua reputação no mercado. Comece ouvindo os clientes. Realize pesquisas ou colete feedback para entender quais são as suas prioridades e necessidades mais urgentes. Isso ajudará a identificar quais demandas têm maior impacto para eles.

Rebalance Portfolios Realign Asset Weightings: Adjust portfolio allocations to maintain target levels. Sell Overweight Assets: Offload assets that have become disproportionate due to market shifts. Buy Undervalued Assets: Purchase assets to restore balance and capitalize on potential rebounds. Prioritize Deviations: Focus on clients with portfolios significantly deviating from target allocations. Protect and Position: Mitigate further declines and position for recovery.

Junto com momentos de turbulência você vai encontrar várias boas oportunidades. Nesse momento: - Revisar a carteira em busca de liquidez. - Veja a alocação da carteira para entender quais classes de ativos você precisa colocar mais valores. - Ordene quais classes de ativos são prioridade nesse momento. Exemplo prático: - Junto com recessão a bolsa vai cair e a renda fixa vai ter taxas mais atrativas. - Nesse momento você precisa ver o que é mais importante para você, risco ou segurança. - Se for risco, filtre as melhores ações, mais perenes e que o preço esteja realmente descontado. - Se for busca por segurança: ativos IPCA + no Brasil, treasuries nos EUA ou Bonds vão estar bem atrativos e você pode comprar, mas analise o emissor.

At every level in the Market, the nominal value of the Index/market is to be translated into an appropriate Valuation: try to go beyond the first derivative, to the second/third derivative. P/E, for example, uses just Earnings, so it would be the first derivative. But the Cost of Capital of a given DCF, with none of the assumptions changed, would be the 4-5th derivative, and would be a better indicator of a material change in Valuations. More importantly, it would not be in the price, because the human Mind cannot process beyond the second derivative. So allocate to a stock where the Cost of Capital>30%, and watch it drop to below <15%. Against an average for the Market at ~15%, which is determined by Inflation+ Real GDP growth rate.

Estes momentos são ótimos geradores de oportunidade. Para proteger seu cliente e se preparar para elas é importante buscar por liquidez no portfólio de seu cliente. Aproveite o momento oportuno para fazer o re-balanceamento.

Explore Opportunities Identify Undervalued Assets: Look for investments with strong fundamentals but currently low valuations. Target Promising Sectors: Focus on sectors or companies that are poised for recovery. Capitalize on Corrections: Help clients invest in opportunities that could yield returns as the market stabilizes. Enhance Returns: Position clients to benefit from potential market rebounds.

Downturn opportunities! 📉 Market chaos can hide gems! We scour for undervalued assets with strong fundamentals, unfairly punished in the sell-off. Sectors like tech, healthcare, and consumer goods often have resilient companies. We identify solid balance sheets 📊, growth potential 🚀, and underpriced valuation 💰. Buy low, sell high! 📈 Our clients capitalize on market corrections, potentially boosting returns when the market stabilizes. Let's find hidden opportunities in the downturn! 💡

Como mencionei nos itens anteriores, manter liquidez para momentos oportunos podem ajudar a alavancar oportunidades geradas. Mesmo sem rentabilidade relevante neste momento, a liquidez pode nos trazer oportunidades de valor fora do comum.

É importante ter um caixa para conseguir aproveitar bem as oportunidades. Caso o mercado esteja de lado, sem direção clara e as possibilidades de investimento não sejam claras, deixe o dinheiro em ativos livres de risco, como CDI. Nesse caso, se surgir alguma janela de oportunidade você consegue comprar

I just explained above, a filter on how to rebalance a portfolio, setting barriers for the Cost of Capital embedded in a DCF. This method, should be traded with very high allocations in a portfolio, to push embedded returns. But it begs the question that in case of a sudden decline in the Market (Black Swan event), the embedded Cost of Capital undergoes a reset. In that situation, how do you recover the MTMs, recoup your losses and restart trading again. This is where it becomes important, in a Prop Book or Treasury, to keep your "debt capacity" aside: either it is a cash flow, or standby capital. This is where Structured Finance plays an important role in a Treasury: pay for this Standby Capital, and draw upon it when the Market resets.

Maintain Liquidity Ensure Cash Reserves: Keep sufficient cash or liquid assets to meet clients' short-term needs. Avoid Forced Sales: Prevent the need to sell assets at a loss by maintaining liquidity. Facilitate Quick Access: Ensure clients can easily access funds for emergencies or opportunities. Balance Needs: Prioritize liquidity to meet immediate needs while safeguarding long-term investments.

Liquidity lifeline in downturns! Maintaining liquidity is crucial for clients' financial flexibility. We ensure easy access to cash without sacrificing market value. Clients need liquidity to cover living expenses, seize investment opportunities, and weather financial storms. Liquidity priorities: cash reserves, short-term bonds, and liquid assets. Avoid forced selling! Protect clients' assets from distress sales. Ensure 3-6 months' expenses are covered. Liquidity equals peace of mind in uncertain markets!

A long-term is not forever: In The Long Run, We're All Dead. All Volatility has a bottom, you just need enough breath, till you are past the bottom. Theoretically, even the Marianna Trench can be survived, provided you are 12 kms tall. There's a ratio between the depth of a whipsaw and the income you get from trading Volatility. This creates your Risk::Reward Ratio. So calibrate your Risk, break your legs but not your neck. This gives you a Risk Payback Period. Finally, the Earth is round, you don't fall off a flat Earth. But this secret is evident only to those who have tried walking around it. You only know the limits of Risk, after you have taken all possible Risk. Risk is what is left over after you have thought of everything.

Eu particularmente, em momentos de crise, analiso bem os emissores e a média de taxas praticadas nos últimos anos. Se a taxa for superior a 10% do tempo, eu vou fazendo aquisições gradativas até reduzir bem meu caixa. Tenho preferência por aplicações com prazo superior a 10 anos e com pagamento de cupons para reduzira duration e refazer minha liquidez com o caixa. O cenário ideal seria aplicar para longuíssimo prazo sem cupons e deixar os juros compostos trabalharem a seu favor

Avalie regularmente as prioridades e ajuste conforme necessário para se adaptar às mudanças no mercado e nas necessidades dos clientes, ter visão de longo prazo ajuda tanto a equipe como seus clientes para uma relação duradoura.