Abu Dhabi: While market analysts and fund managers tend to warn against investing in volatile markets, a banking executive said investors should take advantage of volatility and even use it as an ad hoc asset class.
Michel Longhini, chief executive officer of private banking at Union Bancaire Privée (UBP), the Geneva-based bank, said that while there are definitely risks that come with asset allocation during volatile times, investors can leverage that volatility by reacting quickly and cherry-picking.
“In this kind of volatile market, you can also take advantage of volatility, which is not as such an asset class, but when volatility goes through the roof, and that’s what happened in January, you can have opportunities to consider that it’s worth investing.
That’s why we’ve been very active in structured solutions or derivative solutions, which have been giving a high yield during that period. There is some risk but you have to take advantage of it,” he said.
The CEO pointed that after the volatility in late January, there was rebound in equities in February and March, rewarding those who took advantage of the volatility then.
Longhini’s comments, while not for the risk-averse, echo a similar sentiment expressed by an Abu Dhabi-based fund manager.
In an earlier interview with Gulf News, Saleem Khokhar, head of fund management at the National Bank of Abu Dhabi’s asset management group, said, “You need to be quite brave to be going in to markets that are collapsing around you. But history has taught us that those who are able to come in when it seems to be the most challenging of times do in the longer term tend to make spectacular gains.”
Attractive asset classes
In terms of asset class, UBP’s Longhini said that equity markets still offer more opportunities as there is growth potential in many areas but investors should be “extremely selective”.
“There are still many companies and sectors that are doing well. Perhaps this is a bit more into value stocks and sectors that are protected from overvaluation, which is a risk today where we see some stocks that are overvalued,” he said.
According to a report issued by Bank of America Merrill Lynch in late April, the year-to-date returns on global equities are 3.3 per cent — up from -1.8 per cent in 2015. Emerging markets have particularly high returns of 7.5 per cent (up from -14.6 per cent in 2015).
Meanwhile, Europe’s returns stand at 1.6 per cent, the US at 3.2 per cent, the UK at two per cent, and Japan in negative territory of -2.2 per cent, the report said.
Even more important than being selective is having a diversified portfolio. Longhini said investors should look at high-yield bonds, which provide a good opportunity for investment, and ensure their portfolios are diversified.
Challenging year ahead
With 2016 being “a very challenging time,” investors and asset managers need to diversify away from the usual asset allocation trends, which are proving tougher in providing good yields.
“Two of the important asset classes, which are cash and fixed income, are at the lowest points from a historic basis even with negative interest rates on many yield curves in the world. That’s why in order to bring sufficient yields to clients, you need to have more risk in the portfolio, you need to be more diversified into high-yield commodities, equities, and different structures,” Longhini said.
Brexit and more risks
From a global perspective, the negative interest rate environment is exacerbating the volatility in certain equities tied to industries like technology, banking, and other key sectors. This further stresses the need for well-balanced portfolios.
In the US specifically, equities could face strong volatility in June if the Federal Reserve decides to hike interest rates at their meeting next month. This makes the country’s equities unfavourable for short term investors.
“For UBP, the first quarter was positive in terms of performance and activity. For the end of the year, it’s a bit more challenging because we’re now in an extended period of zero or negative interest rates across the planet, and this is clearly putting a lot of limitations on yields that we can create and limitations on what we can offer in fixed income solutions.
On top of that, you have volatility that will not stop as we have events in the next six months starting with the Brexit vote, US elections, and these are very important subjects that will certainly add volatility in the market,” Longhini said.
Union Bancaire Privée had earlier announced it is buying the international business of British wealth manager, Coutts, from the Royal Bank of Scotland. The deal strengthens UBP’s presence in Asia.
Longhini said that the acquisition was recently finalised with the Coutts Asian operations now fully integrated with UBP.