Dubai: Fund managers are playing safe ahead of Brexit vote, along with meetings of US Federal Reserve and Organisation of the Petroleum Exporting Countries (Opec) members.
Despite oil prices breaching the keenly watched $50 (Dh183) per barrel mark, Emirates Investment Bank (EIB) has trimmed its positions in the UAE and Saudi equities amid the anxiousness and is placing bets on short-term hedging strategies, which offers low yields as it expects volatility to spike up amid the upcoming events.
“We have been de-risking. We have trimmed our positions in the UAE and Saudi in line with our equity exposure globally. We won’t have any strategic positions between now and August,” said Nadi Bargouti, Managing Director of Asset Management at Emirates Investment Bank, adding, “Investors should get into defensive firms, reduce exposure to risky assets as much as you can.”
The Dubai Financial Market has gained more than 5 per cent so far in the year, after registering 15 per cent fall last year, but fund managers are not too convinced.
And even in overseas markets, volatility has abated from the record levels witnessed earlier in the year. VIX, which is a gauge of volatility on the S&P equities, has been trading at relatively low levels for the past two months in line with the range bound behaviour of the S & P500, and fund managers expect the VIX to start trending higher going into June due to speculations with regards to a Fed rate hike and the Brexit referendum.
“Going ahead, we would see a lot of volatility in the market and we would strongly advise investors to play safe and conservative ahead of the upcoming events,” Bargouti said.
Between now and August, investors will have to a lot to digest, first would be the Opec meeting, which is slated later in the week, along with that the US Federal Reserve would meet mid-next month to decide on the rates again. Several Fed officials have been giving hawkish tones in various speeches, calling for two-three rate hikes in 2016 if the economic data supports it. Traders are now pricing in a 30 per cent chance of a June hike, up from 4 per cent last week, as inflation creeps towards the Fed’s 2 per cent target rate and the labour market strengthens.
Alternatives:
The EIB is underweight on equities and overweight on alternatives like trade finance and hedge funds, which exposes them to low risk and gives lower returns.
“We are trying to play safe. We don’t expect Fed to raise rates in June. We are trying to be on the sidelines as the markets are not rational at this point in time. We have been focusing on low volatility neutral market strategies,” Bargouti said.
“We have created strategies and have taken positions and hedged against that position. The return would not be high but at least the strategies would give stable consistent returns for the next couple of months. A significant area of our portfolio has hedging strategies,” he added.
Meanwhile, another asset manager in Switzerland, Lombard Odier is focusing on thematic and technical ideas for yields.
“The only way you can add value is by having a few conviction[s], and have a very focused thematic and technical ideas. A few years ago we developed in the field of technology, health care, nutrition. We find ourselves in world where consumption patterns have changed. One of them is relating to demographics and senior society that has been developing,” Patrick Odier, senior partner at Lombard Odier, told Gulf News in a recent visit to Dubai.
Lombard Odier focuses on driving sustainable trends that will lead investors in the future and integrates the notion of sustainability in terms of risk appraisals.
The fund manager is into impact investing, for instance, in companies with minimum carbon footprints.
“We have a low interest rate environment, and it is one area where the risks are the highest. Our duty is to advise investors to diversify the risk of [their] fixed-income portfolio. We have done it in addition through sukuks, and by developing [a] fixed-income index in developing and developed countries,” Odier said.
Lombard Odier caters to family offices and entrepreneurs in the region, and the discretionary mandate is about 50 per cent of the portfolio, a far cry from other asset managers. Lombard Odier manages assets worth $220 billion of clients’ money, and on an average about 40 per cent is in debt.
“In the negative interest rates environment, investors are changing their strategy like hold to maturity,” Odier said, adding “interesting opportunity is to hold emerging market debt in local currencies, because due to interest rate and currency situation there.”
In general, Odier said, investors have been reducing risk, and some others are investing in difficult times. “Risk profile of investors have become a little more prudent,” Odier said.
