Marc Terras (pictured), chief investment officer of Rothschild HDF Investment Solutions, has shared his view with InvestmentEurope on risk management following the Brexit vote.
He believes markets will face an heavy and volatile atmosphere for some time before a progressive resorption of the economic shock caused by the Brexit vote could really occur.
Terras says three conditions must be filled to let that happen.
“Markets shall perceive the economic shock following the Brexit vote will remain limited to the UK and that it will have very little impact on EU countries and the rest of the world.
“Secondly, sales flows on risky assets shall dry up and we believe that trend can last for several weeks. Lastly, we shall wait until the last publications of companies’ quarterly results as this could add volatility,” he argues.
Terras explains that once the transition period will be over, he believes markets will reconnect again to economic fundamentals and will build up on the favourable development of the global economic cycle.
Once this transition period, which is to last a few weeks, will be over, we believe markets will reconnect again to economic fundamentals and will build upon the favourable evolution of the global economic cycle.
Terras says Rothschild’s allocation has been strongly diversified regarding rates in order to reflect the firm’s search for yield (US high yield, emerging market debt issued in local currency, break-even US inflation and for hedging against market turmoil (eurozone govies).
“This allocation has been tactically managed to get through a period of confusion and uncertainty. The equity exposure of allocation funds has been slightly reduced mainly on Eurozone countries to the benefit of the US.
“US equities benefit from their safe haven status, even though their capital appreciation potential seems limited, especially because of the pressure on margins,” Terras points out.
At the same time, direct exposure to the dollar and the yen has been increased.
“We have also strengthened our exposure to several emerging markets areas such as Russia and Indonesia,that should benefit from their currency appreciation in regard to the postponing of the tightening of the US monetary policy but also from the rise in commodities and better fundamentals,” Terras adds.
He says that for the same reasons, the exposure of Rothschild’s allocation to EM bonds issued in local currencies has increased.
“We have raised our position on the US high yield segment as we stress a drop in defaults due to the rise in oil prices and a mine sector in better shape. We keep a stance on Eurozone government bonds, that are backed by the ECB and for which we do not see any spread tightening occurring on short term,” Terras concludes.