Growth positioning, mind the risks
US equities, real estate were bright spots amid a return of market volatility in August.
“Hedging the cycle” convex instruments, hedge funds provide expected support for portfolios.
Björn Dirk Jesch Head of Investment Management
After the month of July when markets recovered, August proved more difficult. Indeed, the uncertainty and volatility spikes we have witnessed throughout 2018 cannot help but make investors nostalgic for 2017 when the markets moved up and volatility was low. In the current environment, the importance of the AAUC (AA UNION CAPITAL) House View and our structured and disciplined investment process is paramount. Short-term volatility and uncertainty are, of course, stressful for investors, but our long-term investment view is robust enough to withstand the twists and turns along the way.
US equities a bright spot In August, our multi-asset portfolios made gains in USD terms, but were in negative territory in CHF and EUR and little changed in GBP. US equities were strong again, with the S&P 500 reaching a new all-time high. But equities in emerging markets (EM) had another difficult month due to contagion fears and renewed trade tensions.
Navigating the choppy bond waters Bond markets continued to prove challenging. We remain underweight in government bonds as we expect them to continue to underperform in the months ahead. We are now tactically targeting a neutral duration in USD and GBP fixed-income portfolios as we see yields generally rising. As for EM bonds, which have been hit by capital outflows to the USA, we continue to expect a recovery after the recent correction. We thus maintain our overweight position in both EM local and hard currency bonds.
Stabilizing forces The picture was more mixed for other asset classes. In USD, EUR, CHF and GBP-referenced portfolios, hedge funds, which had a positive month, had the expected stabilizing effect. The same holds true for global, US and Eurozone real estate. However, the Swiss and UK-listed real estate indices had a negative impact on mandates in the respective reference currency. Back in July, we introduced a convex instrument (“Hedging the cycle”) to protect portfolios against risks to our global economic growth scenario. This instrument provided support for our portfolios in the unstable markets in August.
Positioned for a rebound We continue to believe that the global economy is healthy and that economic growth will further accelerate. We therefore retain our positive view on equities, favoring, on the one hand, EM for their growth potential, and on the other, Swiss equities for their defensive qualities. At the same time, we are aware of the political and economic risks going forward, including trade tensions, the UK’s Brexit negotiations, and the upcoming US mid-term elections. We have taken measures in recent months to absorb the impact of any possible growth slowdown on portfolios, including the hedging instrument as well as the actions outlined below.
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