Wealth Strategies

Investors Should Consider Geopolitical Hedges While Cost Is Low – Pictet

Tom Burroughes Group Editor 9 July 2024

Investors Should Consider Geopolitical Hedges While Cost Is Low – Pictet

While the cost is still relatively cheap, investors ought to think of hedging their portfolios against uncertainties that come from politics and other sources, the Swiss firm says.

(The interview was carried out before the French national elections, referred to in this article.)

Investors can consider ways to hedge against geopolitical risks and how these might hit market portfolios. It makes sense to consider such moves when risk management – for example through the options market – is relatively cheap Pictet Wealth Management argues.

Recent European Parliament elections that saw right-wing, populist parties make ground, and the risk that France might move in a similar direction in national elections, pushing back against fiscal discipline and free trade, have sparked concerns about how this will affect equities, bonds and the euro. The UK has shifted to a Labour government with a big majority, albeit on the basis of the UK's first-past-the-post system. There is also the US presidential election in November in the background.

Using the language of the “VIX” – the index of equity volatility in the US S&P 500 – César Pérez Ruiz, chief investment officer, Pictet Wealth Management, told this publication that “we live in a market with the VIX at 15 but where the outside world is at 50. It’s very cheap to hedge.”

This disconnect between the seemingly fraught world of politics and war contrasts – at least for the moment – with a calmer market environment. Given this situation, now is an auspicious time to consider putting hedges in place, Ruiz said in an interview at his firm’s Geneva HQ.

Investors could consider buying put options on French equities if, as some polls indicate, France ends up with the National Assembly falling under the control of Marine Le Pen’s National Rally party. (Editor’s note: as of the time of going to press, the NR appears to have lost its bid to take control, although the French political situation remains in flux.)

One broad issue, for example in the US, is that politicians have presided over budget deficits even when unemployment rates have been relatively low, as they are now, Ruiz said. “There’s just this loss of fiscal discipline,” he said.

Instead of relying on the US Federal Reserve, as has been the case for many years, to boost markets by looser monetary policy – the “Fed put” – the world is now adopting more of a semi-permanent fiscal looseness, or “fiscal put,” he continued. 

Against this background, Ruiz said Pictet is “positive” on gold – a traditional portfolio insurance approach.

WealthBriefing asked Ruiz what he made of the “tough love” policies of Argentina’s President Javier Milei, who has pushed for drastic cuts in public spending – including the loss of thousands of public sector jobs – to try to turn around the Latin American country’s poor credit rating. Milei’s support for free market, classical liberal economics and politics has echoes of the Thatcher years and, as under Margaret Thatcher, such harsh medicine is not easy to take.

“I hope it [Milei’s reform package] works,” Ruiz said. "He’s cutting everything and it’s putting the country through a huge shock…there’s no money. If the population is willing to take the hit for longer…then there could be foreign direct investment coming in,” Ruiz said. The jury remains out on whether Milei can pull this change off, he said.

Elsewhere, China faces difficulties if Donald Trump is re-elected to the White House in November, because Trump is keen on ramping up tariffs on countries such as China and its supposed proxies, such as Vietnam, Ruiz said.

Asked about the bi-partisan agreement on protective tariffs – the Biden administration favours taxes on Chinese electric vehicles – Ruiz said. China’s massive rise in EV production poses a serious threat to the West’s manufacturing capacity. Calls for tariffs and non-tariff barriers must be considered in that light, he said. 

Neutral on China
Ruiz’s colleague, Dong Chen, chief Asia strategist at Pictet Wealth Management, said the firm is neutral on China, although “our stance is slightly more positive than a few months ago.” Pictet has been cautious on China for some time, he said. 

A notable disconnect is that while China’s economic growth remains quite strong, performance of its equity markets has been disappointing, he said. “They [China] tend to have bull markets that are short, and long-term bear markets,” he said. 

Turning to a different country – Indonesia – he said this nation is more driven by the world’s commodity cycle. In South Korea, the country’s equities are notable for “long-term depressed valuations,” he said, due to poor corporate governance and low ROE. The Korean government recently started a “value-up” programme aimed at addressing this “Korean discount” which had some initial success. 

On Japan, the weakness of the currency is mainly driven, Chen said, by interest rate divergence between the country and the US. “There’s very limited room for the Bank of Japan to hike rates,” he said. 

Chen said that in India, policy reform of the economy, in areas such as infrastructure, will continue, even though recent national elections were disappointing for the governing party. 

He concluded by noting that rising US tariffs on China have already been discounted by the Chinese equity market. “Despite all these things, Chinese business will still find ways to live with it and get around it. China still exports a lot of stuff that ends up in other places.”

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