Investment Strategies
GUEST OPINION: Lombard Odier Investment Managers Sees Opportunity Amid Uncertainty

The chief investment officer of Lombard Odier Investment Managers says that while there is a lot to be uncertain about at this stage, problems mask a number of opportunities ahead.
There are plenty of uncertainties around and this seems to
perplex, and even alarm, some investors. But the lack of clarity
brings opportunities. In this vein, Jan Straatman, chief
investment officer, Lombard
Odier Investment Managers, takes a look at the investment
landscape. The views of the author are not necessarily shared by
the editors of this publication.
2014 will see slow global economic recovery. The US economy
should speed up as new growth drivers emerge while monetary and
fiscal policy stays supportive.
But in Europe the hoped-for recovery is optimistic. The repair of
national balance sheets and restructuring of the financial sector
casts a shadow over the region. Unemployment is too high and
productivity growth too low. Growth will be anemic (at best).
The weakness of Europe’s financial sector is an enduring
headache. Faced with balance sheet pressure and regulatory
capital needs, banks - despite politicians’ wishes - are still
reluctant to lend. Without more lending to consumers and SME’s,
how can there be strong growth? The European Central Bank might
lower interest rates further, but we wonder if this will work
without the comfort blanket of fiscal stimulus, which governments
have taken away.
In Japan the cocktail of quantitative easing, public spending and
a weaker yen coined a new term: “Abenomics”. Although Prime
Minister Shinzo Abe’s policy is a big step in the right
direction, it may be too little, too late in the face of Japan’s
vast debt problem. Japan needs global growth badly if it is to
rebound strongly, but in that’s unlikely anytime soon.
Emerging markets’ growth advantage over developed economies has
shrunk recently, but we expect that the gap will stabilise during
the first half of this year and widen again in the second half,
particularly for countries with solid economic policies. And keep
an eye out for a faster-than-expected slowdown in China, as
policymakers grapple with non-performing loans and the risk
increases that policy is over-tightened.
And my savings…?
The risk of a major systemic quake, such as a government bond
default or the collapse of a large bank, has subsided, thereby
increasing confidence and risk appetites. The option to park
money in “safe haven” bonds is no longer recommended: there is
widespread acceptance that the trend of declining interest rates
is over. The debate now is not if, but when, and by how much
rates will rise.
The benign economic outlook, low interest rates, reasonable
valuations and high liquidity, continue to support a slightly
overweight equity position in the first half of the year. Despite
the less rosy outlook for Europe, European equities are more
desirable on relative valuation measures, such as dividend yield,
and because they have lagged US stocks, which now price-in
recovery.
Emerging markets are overshadowed by the smaller growth gap with
the developed world, political uncertainty and risks from QE
unwinding. However, later in the year, as the gap widens, we
expect to reverse our underweight emerging markets position, into
overweight. We’ll focus on consumer-related stocks, because of
the long-term shift towards domestic demand and regionally we
will favour Asian countries.
While it’s a consensus view to be underweight government bonds,
the shift out of bonds is not finished. With flat to rising
interest rates (starting from historically low levels) and with
the risk of rising inflation over time, higher yields are
justified. This reverses the alluring risk/return relationship
from government bonds for the last 25 years. Over the next couple
of years we expect marginally positive returns, but with
(potentially large) downside risks.
Bond investors searching for yield will therefore look at
corporate bonds. But investment grade bonds are too rate
sensitive and offer insufficient protection. Investors should
move down the credit curve and focus on the crossover zone
between investment and non-investment grade. Convertibles will be
another interesting alternative, as they combine exposure to both
corporate bonds and equities.
The months ahead offer plenty of economic policy
uncertainty. There will be less synchronisation between
regional growth cycles. Expect a bumpier ride than
2013.
The impact of any policy mistakes will be huge. A long-term view
on asset allocation makes little sense, it’s vital to constantly
review the situation and take advantage offered by
mis-pricings.