“There has been a widespread breakdown in conventional correlations… that have made markets difficult for investors to navigate.”

As the recent upsurge in volatility shows, the outlook for risk assets is becoming more uncertain than ever. Trade wars, doubts about economic and corporate growth prospects, big fluctuations in oil prices and the winding down of expansionary monetary policies, not to mention gathering political and geopolitical tensions, have all contributed to market wobbles since early October.

How to respond, especially as, according to César Pérez Ruiz, PWM’s Head of Investments & CIO, in the December 2018 issue of Perspectives, a closer look “ reveals a widespread breakdown in conventional correlations…As a result, markets have been marked by anomalies that have made them difficult for investors to navigate”?

Right at the beginning of this year, Pérez Ruiz predicted that a return of market volatility and, in response, the need for more defensive plays focused on low-leverage equities and quality fixed income would be major themes in 2018. PWM had positioned accordingly, and “markets have narrowed in our favour,” he said.

Pérez Ruiz predicts that geopolitics will continue to play an important role and identifying companies with pricing power will become ever more significant as we move closer to the end of the market and economic cycles. But the Pictet CIO also believes he can turn the market anomalies he mentions to his advantage: “Given reduced valuation levels and exaggerated market concerns…we have started to invest in select emerging markets for the first time this year,” he writes, while hedge funds and alternatives could become ever more attractive, “especially if equities and fixed income correlations remain positive”.

The attractiveness of alternative, private investments is a theme taken up by Christophe Donay, PWM’s Chief Strategist and Head of Asset Allocation & Macro Research. Donay points to analysis carried out by his team that shows that the ‘illiquidity premium’ (the extra yield investors demand for placing their money in lightly traded instruments) associated with private assets can give a meaningful boost to portfolio returns as returns from more traditional instruments fade. Private assets are not a “free lunch”, as they are generally hard to value and exit. But Donay signals the emergence of liquid alternatives offering daily or weekly liquidity, “designed to palliate the concerns of investors in this regard.”

In an interview, Pictet Alternative Advisors’ CEO Nicolas Campiche is also keen to underline the merits of private investments, particularly private equity. “If I were drawing up an asset allocation today,” he says, “I would be maximising the allocation to private equity to the extent a client’s risk profile allows, especially as the market cycle turns” and the returns from traditional assets declines. One area Campiche highlights is venture capital in the tech sector. With companies going public later much later now than in the 1990s, “there is significantly more value for private investors to capture than before”, Campiche says.

With Brexit on everybody’s lips, James Ind, PWM’s head of multi-asset flexible & single-asset strategies sets out in this issue of Perspectives the prospects for sterling as well as UK equities, bonds and property under different Brexit scenarios. Among myriad other concerns for investors, the fast-changing domestic political scene, and notably the rise of Labour’s resurgent, more militant left wing, is perhaps one of the main ones. “The Brexit hors d’oeuvres may be starting to be digested,” Ind writes, “but the political main course has yet to arrive.”

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