Lombard Odier adds to exposure to emerging markets, European debt

Dubai: In an environment of low growth and low financial returns, fund managers are anxious to find investment themes. So in order to deliver an alpha amid all the volatility since the start of the year, Swiss asset managers such as Lombard Odier have added to its equities exposure to emerging market and European debt in January and February, when investors lost $8 trillion (Dh29 trillion) in wealth.

“We have taken advantage of that crisis and added risk to our portfolios. We have done that by rebalancing consistently equities’ weight in the portfolio,” Stephane Monier, Chief Investment Officer at Lombard Odier told Gulf News in an interview during a visit to Dubai.

“We felt that risk aversion was exaggerated in terms of macroeconomic developments. We are not extracting extremely high growth and we are not even expecting an economy that is collapsing. We are expecting slow and steady growth for 2016,” Monier said.

Outperformance

In 2015, the fund gave a return of 2.5 per cent in US dollars versus a benchmark of 1.3 per cent, marking the fourth year of outperformance. Lombard Odier manages $350 billion (Dh1.3 trillion) of clients’ money from institutional and retail investors.

But in 2016, the firm is telling clients to lower their expectations as global concerns mount.

“One of the messages that we are giving our clients is that we are living in low growth, and returns that we would get on our investments would be much lower,” Monier said.

Since 2012, the world has been in a low growth and low trade environment — with manufacturing in China, the factory of the world, contracting. This trend is likely to continue in the near term. analysts at Lombard Odier say.

But they are not leaving any stone unturned to deliver alpha to clients.

“Our investment philosophy favours sustainable business models, industry leaders, cash-flow rich and profitable companies. In emerging markets, we prefer companies with strong corporate governance,” said Samy Chaar, Chief Economist at Lombard Odier.

But even in investment ideas, Lombard Odier feels there are a confluence of factors at play amid divergent monetary policies. “Within emerging markets, best valuations are to be found in Latin America, but the strongest economic fundamentals are in Asia,” Chaar said.

Lombard Odier may become more positive on emerging market equities in another 6 months, as they don’t have that level of confidence. Any stability in oil prices, emerging currencies and the China situation, would trigger a change in their view on the market. The asset manager expects to see some upside to European equities while US equities look expensive.

Oil prices

Lombard Odier feels that a better way to play the stability in oil prices is to buy emerging markets, which have been the primary victims of the fall in oil prices.

“We believe that oil prices will normalise to equilibrium levels around $50 per barrel by the end of 2016 — but nowhere near triple digit numbers. Getting an exposure to oil futures markets is not necessarily the best way to profit from this rebound, as oil price curves are in contango, which means that the actual prices that investors pay are higher than the spot prices,” Chaar said, adding, “That’s where you have the best risk-adjusted returns, and that is why we are chasing emerging markets local debt in local currencies.”

“Oil prices will not rebound easily in a sustainable manner. US supply is coming down and capex plans are being cut, but Opec’s intentions are difficult to read and to predict. The next event will be the meeting in Doha, where we might have more information,” he said.

On Wednesday, crude prices rebounded 5 per cent on shrinking US inventory. Brent crude, which has rebounded from its lowest level in 12 years, is still down 67 per cent from over $100 per barrel struck in mid 2014.

Factbox: Lombard Odier looking at strategy with focus on global consumers

Lombard Odier is looking at potential opportunities for a strategy that would focus on global consumers, said Lajla Aganovic, Portfolio Manager for Global Equities, Lombard Odier Investment Managers.

“We think there are a lot of investment opportunities with the global compounders, specifically internet companies like Amazon among others including Starbucks etc which have global footprint among consumers,” Aganovic said.

“There a number of other sectors that provide good investment opportunities for investors, including food, beverages, and clothing. We do not see investment opportunities in any sector that is impacted by government regulation, for example, gaming,” she added.