‘Equities recovery will not be a straight line’

Dubai: With quantitative easing continuing globally — the latest being Japan’s Central Bank’s announcement of an open ended asset purchase programme in January — search for yields, as expected, is becoming harder this year. That has meant investors starting to reduce their fixed income allocation and considering riskier assets in favour of an increased exposure to equities and alternative investments in their portfolio.

LGT Group, a private bank with $100 billion (Dh367 billion) assets under management and owned by the royal family of the Alpine principality of Liechtenstein, believes that while one can invest in equities successfully, it is better to be aware that the strong recovery in the markets will not continue in a “straight line.”

In an exclusive interview with Gulf News last week, Prince Max von und zu Lichtenstein said that they have reduced what used to be over exposure in the US and shifted to other regions.

“In terms of longer term exposure the bank continues to be overweight in emerging markets,” said Prince Max.

This is, despite the likes of Chinese, Indian and Brazil economies slowing down. Only India’s stock markets have had a strong run, with its Mumbai exchange index Sensex touching the 20,000 mark in mid January.

However, when it comes to Middle Eastern stock markets, the bank is yet to wade in at this stage.

“[They have been] very, very volatile in the past — we anticipate them to remain very, very volatile,” said Prince Max.

The bank has been watching the regional markets carefully: in how they develop further.

“The markets [here] tend to be relatively small, less liquid [and] strongly driven by regional sort of players,” said Prince Max. “So [they] are not that easy to play with… [also have] not been easy markets to make money in a predictable consistent way.”

But LGT group does have exposure to fixed income securities of the region, though, increasingly, it is less attractive.

“We see that more and more people have picked up on some of these opportunities and what’s more, the markets are not that sizeable and we see that the attractiveness of some of these players coming down,” said Prince Max. “Yes,… we still have some exposure to some of these mainly fixed income opportunities.”

Globally though in search of yields in a zero interest rate environment, LGT prefers to be in more niche areas when it comes to fixed income investments.

“It is tough to see how you are going to make a lot of money going forward in the sort of typical fixed income categories,” said Prince Max. “But there we tend to be more in sort of markets which we believe continue to have interesting risk return characteristics such as insurance linked securities, cat [catastrophe] bonds, such as specific specialty fixed income categories.”

Private equity appears more attractive as an investment option. The asset class follows its own sort of cycle, which largely depends on health of the banking sector.

With all the capital constraints that European and US banking sector is suffering from, there’s quite a bit of constraint on the leverage side typically for smaller companies that allows P/E firms to acquire companies at relatively low valuations in comparison to longer term cycles, explained Prince Max.

“So we do think that [not only] at this point of time but also for the next two three years it will be a pretty good environment for [private equity] on that front.”

On the hedge funds side, Prince Max said that it is absolutely critical to be close to the best investment managers. Viewing hedge funds as providing diversification to our other exposures, he feels investors be invested in strategies, which are not that closely correlated in terms of historical performance, in terms of their approach and in terms of the risk they are taking. So we are firm believers that in investing in hedge fund means investing in best investment managers

“But it requires special expertise, it requires constant monitoring and staying very close to those funds. We have done very well over the years and continue to believe that there is good value to be found there as well,” said Prince Max.