Volatile times lie in wait for global economy
Didier Duret, ABN Amro Private Bank
Wealth managers do not have to be talented futurologists to know that the rebalancing of the global economy means higher volatility.
They can already see this through the summer ructions of global equity markets – particularly in China, where the Shanghai SE Composite Index dropped 45 per cent from its June 2014 peak to a low of 2,851 in August 2015, before staging a mild recovery to around 3,150 in early September.
The ups and downs will continue because different regions and regimes are no longer in kilter with each other, thinks Christophe Donay, chief strategist at Pictet Wealth Management in London. Around the world, “at present economic cycles are desynchronised, monetary policies are desynchronised, fiscal policies are desynchronised. Because of this, volatility is rising, particularly in currency markets.”
His three-pronged response: “First, diversification is key. Second, avoid currency exposure, because currency volatility makes it very difficult to time profit-taking on investments. Three, stay away from emerging assets.” These tend to be more volatile than developed market assets, and will be even more so as the emerging market growth model is put under pressure by falling commodity prices and changes in the Chinese economy.
Pictet is practising diversification by investing in assets that have a low or negative correlation with equities. These include US Treasuries, real estate and private equity. To magnify the diversification, it invests in real estate and private equity funds of funds, rather than directly. To balance these investments and provide an opportunity for benefiting from global growth, it also invests in cyclical stocks, which have a high beta to stock markets as a whole.
Another way to respond to volatility is to buy on the dips – and what dips there have been in equity markets. “Earnings growth for Chinese companies has been revised down by about 4 per cent since June 2015, but the market has fallen by 30 per cent,” says Didier Duret, chief investment officer at ABN Amro Private Banking in Amsterdam, referring to the offshore MSCI China index.
“This is probably an excessive move if you look at the hard data.” Mr Duret blames this on “an unwinding of speculative leveraged trades, which is creating an opportunity to enter the market at good valuations”.
The bank is overweight Chinese equities, though it favours offshore shares rather than the particularly volatile mainland A-Share market. ABN Amro is, given expected future volatility, likely to find plenty more opportunities for dip-buying in the coming months and years.
