Dubai: Cash levels with investors jumped to 5.8 per cent to their pre-Brexit levels in October, according to a Bank of America Merill Lynch survey, as risks from US presidential elections to a possible hike in interest rates persist.

But fund managers are advising investors to brace for risks and look for asset classes that can provide the extra returns in the current volatile environment.

“We recommend 5 per cent cash in a diversified portfolio and would not recommend increasing this in the current environment as there are still higher yielding opportunities out there in our view,” Dirk Effenberger, head of the Cross-Regional Investment Office at UBS Wealth Management told Gulf News over email.

The US stocks witnessed the biggest losing streak in five years last week, with gold gaining more than $25 (Dh91.75) since last week, the Mexican peso has depreciated more than 10 per cent since January.

“In general we recommend a diversified portfolio for investors in any market environment over the long term,” Effenberger said.

Currently, UBS is underweight in high grade bonds versus equities as UBS feels that stocks will be supported by still ultra-low yields and high quality bonds will be hurt by upcoming rate rises.

“We think a re-pricing of the government bond curve would be likely; however, central banks will follow a careful and conservative monetary policy approach, which means only gradual rate increases in the US in 2017,” Effenberger added.

Asset purchases

And investors should brace for a reversal of easy money policy from the European Central Bank, which has already pumped trillions of euros in the system,

“For the ECB, we expect a continuation of asset purchases, though at a potential slower pace over the course of 2017,” Effenberger said, adding that may cause US dollar to weaken over the next 12 months.

However a gradual rise in US rates may bode well for emerging markets, which for a long time have been an investor darling.

“Emerging markets seem better prepared for Fed rate hikes and — again — we expect only a gradual tightening of monetary policy conditions in the US next year,” Effenberger said.

The MSCI emerging market index has gained 12.5 per cent so far in the year compared to 3 per cent rise in Dow Jones Industrial Average.

Fund manager from Columbia Threadneedle agreed with UBS’ view.

“In this region, we see better and more stable growth prospects with most EM economies having adjusted to slower trade; scope for local monetary and fiscal support; reduced China fears; and rising capital flows,” said Mark Burgess, CIO EMEA and Global Head of Equities at Columbia Threadneedle Investments.

“Crucially valuations are attractive, with earnings supported by the above factors and rising sales forecasts in 60 per cent of countries in Asia. We are therefore seeing opportunities among high-yielding and high-growth Asian emerging market companies, though are mindful of the risks posed by any US interest rate rise and the impact of the US dollar,” said Burgess.

Inflation

The Fed’s go slow approach on a rate rise, may result in inflation, and that analysts believe could be an overriding theme next year as energy prices stabilise and the cost of housing and medical care rise.

Analysts say inflation could breach the Fed’s threshold of 2 per cent target next year, and that would cause investors to pour money in some inflation hedge instruments.

“We expect US inflation to pick up over the next 12 months, mainly driven by the tighter US labour market, and would advise investors to hedge their portfolio with an overweight in US Treasury inflation protected securities versus US nominal government bonds,” said UBS’ Effenberger.