WEALTH

Billionaires lost a collective $1 trillion last year as volatility spiked. But tactics can be employed to stop this happening again. Jamie Crawley has spoken to leading private banks and wealth managers to find out their investment outlooks for navigating an uncertain world.

Even in the face of an economic slowdown, experts stress the importance of remaining engaged, and making your cash work hard for you.

Jeffrey Sacks, chief strategist for EMEA at Citi Private Bank says: “Our advice is to stay invested. It’s too early to get too cautious. We had an example in December when we had a period of market weakness and our advice to clients was stay invested. In using cash more aggressively, we look at areas like short-term treasuries, which are giving us significantly better yields than we’d be getting on cash deposits.

“When we look at fundamentals of an area like Asia, we come up with return expectations that are in the low teens. Compared to deposit rates that are still very low, that looks compelling to us.”

Sacks’ colleague, Jeremy Knowland, adds: “Quite often when we really get cash to work harder, we get a better understanding of what clients’ commitments are for the future, particularly around private equity and real estate.

“If you’re not careful, cash can sit on the side and a private equity firm can deliver a great internal rate of return.”

Fixed income, predominantly government bonds, is one way to navigate volatility both for short-term gain and to position portfolios along more defensive lines.

“We like US investment rate bonds,” says Sacks. “We’re getting in the region of 300 basis points compared to investment bonds in Europe. And we’re not seeing any signs of leverage and defaults picking up the in the US.

“We’ve had a back-up in rates in the US in recent months and that’s giving us an opportunity in the short end of the treasury market. So one and two-year treasuries look attractive to us.”

Coutts, on the other hand, favours European bonds as areas for opportunity. “A yield in euros is worth far more than a yield anywhere else,” head of multi-asset investments, Alan Higgins, says. “Hedging euro assets back into sterling, and especially dollars, is very powerful.”

Focussing on safe, pragmatic investments is a way to protect your portfolio during uncertain times, according to Pau Morilla-Giner, chief investment officer of British wealth manager London & Capital.

“Structurally, we live in a world at the end of a cyclical recovery, so we must admit that the next couple of years will be less exciting.”

“We like technology as a long-term theme. Over the next 10 years, we will see the growth of augmented reality for example.

“Short-term, however, we like less disruptive, more traditional technologies, like IBM, Oracle and Microsoft. These are very mature, very predictable, and have very good pricing power. They’re not very exciting, but for companies to continue to exist, they need servers and they need solutions provided by these big names.”

Augmented reality will be a key investment theme over the next 10 years

HSBC predicts in its Global Investment Committee paper that headwinds to emerging markets should now ease owing to a potential weakening of the US dollar.

“We actually believe we will only see one rate hike from the Fed in 2019, so the USD is unlikely to rally very sharply.

“The principal beneficiaries should be the emerging markets, in our view. Higher US rates and a stronger USD were some of the most significant headwinds for EMs, and these should now ease.”

Caroline Simmons, deputy head of UBS’ UK investment office says: “We focus on the value style of emerging markets. Value is trading at 1.1 times price-to-book value, whereas the growth index is trading at 1.8.

“So I do think there’s an opportunity to capture that price disparity that’s going on within the emerging market space.”

Among emerging markets, Coutts picks out Russia as one to look at. “Russia always attracts geo-political volatility, so there is a discount for that,” says multi-asset investment manager, Monique Wong. “Russian companies have low net-debt levels and they generate cash flow of 17.5%. So they have options: they can increase dividends or they can initiate buyback programmes.”

Investing in Russia could produce positive returns in the long term

This is an area that’s become increasingly important in recent years, and resonates even more in an environment where there’s a need to be selective about the areas in which to invest.

“If you look at the value of the S&P 500, over 80% of the value of the companies in that index is linked to their intangible assets: brand, reputation, and goodwill,” Caroline Simmons says. “That is the sort of thing that is more closely linked to your ESG performance, and I think that with the rise of social media, it is harder for companies to get away with bad practice. Companies are under greater scrutiny, and therefore I think that is a trend that’s here to stay.”

“So in an environment with slower growth and you want to be a bit more selective, this is another way you can do it: by looking at companies that have a sustainable trend to them.”

Toyota is one of the companies on the S&P International Environmental & Socially Responsible Index

UK equities could be your portfolio’s surprise pick according to Coutts and Citi who both recognise their strong upside, while acknowledging that they come with the eternal asterisk of the outcome of Brexit.

“UK equities are unloved, under-appreciated and hugely under-owned, and for good reason,” Monique Wong says. “We have this elephant in the room called Brexit, but Britain has big multinational companies which are profitable and the valuations are attractive.

“They have very good dividend support at more than 5% forward dividend yield, and cheap currency – 15-20% cheaper compared to before the referendum.”

Sacks states: “We’re neutrally weighted and we think the outlook is very dependent on the roadmap that we eventually get with regard to Britain’s exit from the EU.

“The neutral weighting is underpinned, on the plus side, by reasonable valuations and high dividend yields. Against that we’re going through a cyclical downturn which is gathering momentum because business and consumer confidence are falling. Added to that is the risk premium, which is tied to how the talks with the EU progress and how Parliament votes.

“What we’re looking for is a roadmap that gives us domestic political stability with clarity in the future training relationship with the EU and beyond. And that will take some time.”

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