Market dangerously complacent, warns Rothschild Wealth Management
Rothschild Wealth Management is keeping a high allocation to cash, short-term bonds and gold, saying a “dangerous complacency” has taken hold of markets.
Dirk Wiedmann (pictured), head of investments at Rothschild Wealth Management, is conscious “ample liquidity” could help markets rally – as it did in 2009 and 2010 – but he said “now is not the right time to be increasing our exposure to risky assets”.
Instead, RWM is studying how best to build protection into client portfolios, covering off equity, commodity and currency markets.
In his list of risks, Wiedmann notes oil’s recent price spike to new records in euro and sterling terms this year and, and “further rises probable”; some “new cracks in the eurozone”, as Italy said it would not be within budget deficit targets it signed up to just last month; a sharper slowdown in Chinese annual economic growth, with Beijing now expecting 7.5%; “unsustainable sovereign debt levels” with some Bunds yielding under 2%; and Japan “getting close to a tipping point”.
Nevertheless, Wiedmann acknowledges some ‘risk assets’ are attractive. For example, equities have a “longer-term bright outlook, as valuations are undemanding”. The “murky outlook” makes hedge funds relatively attractive. And real estate “remains attractive for long-term investors as a tangible asset with fairly predictable cash flows”.
But there are downsides with each.
Property would suffer in any correction in equity markets, so RWM is underweight. Wiedmann notes most fundamental indicators for real estate are improving and vacancy rates for offices globally are at their lowest point for two years, “but valuations are generally becoming stretched”.
Over the medium term, RWM says, bond returns will be “very poor, as bonds are expensive, overvalued and vulnerable to any rise in inflation”. Current low yields on core debt “do not offer anywhere near enough compensation for the associated risks”
“In the US, UK, Europe and Japan, the fundamentals are weak, with large budget deficits and high and rising levels of public debt. Government bonds also offer no compensation against a surge in inflation, an outcome we fear, given the extraordinary monetary stimulus central banks have launched in recent years.”
RWM avoids peripheral eurozone debt, favouring Sweden, Norway and Switzerland. It holds leading government bonds with durations of up to five years, “as they can be a useful safe haven at a time when major central banks seem committed to keeping yields artificially depressed”.
Wiedmann said equities are “overbought in the short term, and may suffer a setback. Over-optimism in the market makes us concerned about the immediate outlook.”