26 September 2018, 16:03 GMT
We spoke to three experts from across the investment industry about how uncertainty in markets is impacting the risk appetite of investors and the strategies they are deploying to navigate growing volatility.
- Paolo Biamino, Head of Strategies, Third Parties and Business, at Euromobiliare Asset Management SGR in Milan
- Janet Li, Wealth Business Leader, Asia, for Mercer, the global investment consultant, in Hong Kong
- Rosita Lee, Head of Investment Products and Advisory Business, at Hang Seng Bank in Hong Kong
How are attitudes changing?
Paolo Biamino, Euromobiliare: We have to find a new investment discipline. The main concern is that monetary policy and fiscal policy actions are not sufficient or not accepted by the markets as sufficient.
Rosita Lee, Hang Seng: We have put more emphasis in analysing the implications of capital and trade flows between US and non US countries. Ongoing rebalancing could strengthen US dollars versus other currencies particularly the emerging market currencies, thus further causing volatility in the local equities and fixed income markets outside of the US.
Janet Li, Mercer: It’s time for the Fed, as led by them, to introduce more quantitative tightening. The pace at which the tightening is being introduced to the market will definitely affect how clients position their portfolios.
How is this affecting risk appetite?
Rosita Lee: The current situation just creates a lot of uncertainty in the market for investors that they might be a bit concerned. So they either stand on the side to wait for investment opportunities or they just do nothing.
Paolo Biamino: The client base we have in Italy is traditionally fairly conservative. In fact they have been buying bonds. It has always been very difficult to sell equity solutions.
Janet Li: Generally clients are becoming more cautious. They would prefer more defensive investments than more aggressive investments.
What strategies are being employed?
Rosita Lee: We have been placing more emphasis on new and non-traditional strategies. Alternative asset classes and market neutral strategies are some of the examples that have drawn more attention from our customers with certain risk profiles. And some structure products could also be useful and relevant depending on the customer risk profile.
Janet Li: I think for the equity portfolio generally we wouldn’t recommend clients to take very short term allocations according to the market changes.
Paolo Biamino: So what we have done has been trying to devise solutions where you have equities but with a level of volatility that is sustainable for our clients. An example could be income funds where you have an equity component alongside lower volatility fixed income.
Rosita Lee: We have formed a team of experts who are specialists on a variety of markets and asset classes and they can give our customers a more in-depth understanding of the challenges in the markets.
Janet Li: For fixed income we have seen clients generally would look to shorten the duration. But at the same time some clients might consider holding to maturity or longer term dated bond portfolios. Which allows them to ride through the volatility and not be affected by the ups and downs in market values. So in a way you can say there are two extremes.
Paolo Biamino: For more sophisticated clients: alternative strategies, long short equities. They work very well in terms of optimisation of the risk return profile of the client and control of losses.
What changes are being made to asset allocation?
Janet Li: More funds are more short term or tactical. They would look to introduce or add alpha through a more tactical place in their portfolio or shorter term dynamic asset allocation.
Paolo Biamino: Portfolios should be constructed in a holistic way considering both directional positions - long only equities, for instance - and relative value positions - long short equities. People should transition between long only and long short as part of the flexibility that in general is needed to withstand more volatile periods.
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