Angel Sanz, CIO, Notz, Stucki & Cie, the Geneva based financial services provider, has suggested that while clients have a positive view on returns made through 2019 across equities, fixed-income, commodities, and hedge funds, they also remember what happened in 2018, when they suffered losses.
The current environment is one in which all asset classes trade at rich valuations - fixed income government bonds yield between -0.5% to 2.0%; credit spreads are trading at levels similar to January 2018, before spreads widened; equities are trading at very expensive levels on a historical basis.
"In all these cases, you can explain almost everything by the low level of interest rates. As a result of this, some clients want to sell some risky assets and some other clients would like to hedge their portfolios."
Q. Apart from gold, do you expect increased interest in asset classes that also historically act as hedges against downside risk?
"We have several instruments other than gold. The most useful one is plain vanilla equity options on broad indices. Volatility is relatively low and this product allows the client to protect some of the losses if markets fallm, and simultaneously do not cap the upside if markets continue the positive trend. This is clearly our preferred hedge."
"Another interesting possibility is to buy long-term US bonds, which have typically been good hedges when there are slowdowns or recessions in the economy. On the other hand, if we expect an increase in inflation expectations, the good hedge would be gold, obviously, and inflation-linked bonds. The only issue with this hedge, is the prices of these instruments are already a bit expensive. Finally, a position in Swiss francs is a good hedge also, as Switzerland continues to be a model economy from the macro point of view."
Further views on how fund providers and fund buyers are positioning themselves in respect of gold and other traditional hedges against uncertainty in markets, and increased volatility and other risks, can be found in the February edition of the InvestmentEurope magazine.