The author is the Chief Investment Officer of Swiss bank Lombard Odier, which specializes in private banking and capital management. The foregoing is provided by the Lombard Audier Group as a service to readers for informational purposes only, and does not constitute investment advice or investment marketing that takes into account the data and special needs of each person. The foregoing does not imply a guarantee of return or profit
The markets are at a complex point – price falls, a kind of restart followed by rises, and now we see mostly great uncertainty. In this challenging environment, investors need to focus on choosing quality assets – in all sectors and from all types of assets. They must choose investments that continue to generate strong cash flows and income, and incorporate tools to protect portfolio returns. These are the rules of thumb and most of our recommendations for investment decisions in the second half of 2022:
1. Take care of the quality
Given the current state of the markets, one should focus on quality assets, preferring investments with strong cash flow and low leverage as the cost of capital increases, and value investments with stable growth forecasts, as well as tools for protecting return on investment portfolios.
2. Prefer investment-rated bonds
We started 2022 with a cautious forecast for fixed income products, which gradually became more constructive as interest rates rose and corporate bond spreads increased. And more. Yields on global investment-grade credit have been at their highest levels for over a decade, which is why we have built positions in this market segment. As the risk of recession increases, so does the risk of insolvency in corporations with large debts. Investors need to be careful about high-yield credit for now.
3. Prefer value and quality stocks
A combination of high inflation and tight financial conditions plus the strong dollar, weighs on emerging market growth and profit expectations. The value of public companies declined in line with rising capital costs, while profits grew. Profitability, strong cash flow, low debt and liquidity needs, and high and stable spreads, are the components to look for in stocks. Value stocks in the energy, financial, industrial, materials, mining and defense sectors such as services and healthcare should be preferred, and exposure to Europe and emerging markets should be reduced. It is important to differentiate within the technology sector and to prefer companies that can pass on costs to customers, enjoy strong cash flows and present profits.
4. Build an asymmetrical portfolio profile
Option strategies such as POT gains on US and European stock indices can offer the portfolio protection against further changes in the markets – it makes sense to remain neutral in the stock markets. There will be a recession, no further losses can be ruled out, we must try to protect the portfolios from a recession, and continue to expand our hedging strategies based on market conditions.
5. Give priority to Chinese stocks
Chinese stocks offer a rare bright spot in the markets. Earlier this year, they performed less well than other emerging marketers, and valuations fell, but now their situation is improving. The reasons for this are that the Central Bank of China has lowered interest rates, no extensive regulatory change is expected, the impact of the corona is diminishing, debt levels in the housing market are improving and the government is working to stabilize the economy.
6. Invest in a variety of goods
Investment in commodities protects investment portfolios from the effects of high inflation. Unlike in the last 20 years, commodity markets are now more driven by supply, so prices can remain supported even if demand slows. Raw materials suffered from supply disruptions following the war in Ukraine, when the prices of many goods rose. The specific preference is for industrial metals, which continue to benefit from government investment in infrastructure projects, and the economic shift to energy sources relevant to decarbonisation, as part of a multi-year trend. China’s reopening should also support demand tactically. It is worthwhile to remain underweight in gold, which rises and falls in line with rising inflation, market uncertainty, rising exchange rates and the strength of the dollar.
7. Assume that the dollar is expected to strengthen
The US currency is expected to remain strong in the second half of 2022 as interest rates rise. The dollar should be supported by the current uncertainty, and by the pricing markets of tighter monetary conditions. Historically, the dollar has proven hedged against stagflation risks. Exposure to the dollar is expected to offer protection in investment portfolios, and we expect the euro-dollar ratio to reach 1.02 towards the end of 2022, as liquidity tightens and growth slows around the world.
8. Assume that volatility will continue
Tighter financial conditions, political instability and the risk of erring in monetary policy mean that market volatility will continue. We now believe in active portfolio management, which requires a broader set of investment tools to combat portfolio returns threats, including alternatives such as hedge funds, various credit strategies and a focus on sustainability. These strategies can provide sources of unrelated return to public markets. As always, tactical discipline remains key, as asset allocations need to change rapidly to reflect the frequent changes in market conditions and evolving opportunities.
9. Consider investing in European real estate
Direct investment in European residential real estate offers another tool for lowering volatility in the launch portfolio and an asset that protects against the effects of inflation. Exposure to this type of asset can provide a steady income stream. The logistics real estate sector in particular is in short supply.
10. Sustainability is an opportunity
Most of the companies in the field of sustainability that offer long-term profit growth have been hit by the increase in the cost of capital. However, the transition to a zero-carbon economy is only accelerating and not slowing down, following the Ukraine war, as European governments will invest in alternative energy sources, and as a result we expect renewable energy companies to report positive gains. Today’s volatility offers a window of opportunity to position portfolios in such a way as to profit from the transition to a carbon-free economy in the years to come. We still believe that sustainability remains the greatest investment opportunity of our generation.