The venerable wealth management firm sets out its asset allocation calls for 2015.
As firms continue to churn out predictions for the coming year (see examples here and here), one of the most blue-blooded names in finance, Rothschild Wealth Management, sets out its asset allocation views. Kevin Gardiner, global investment strategist, gives a detailed view of where clients should be positioned.
Corporate and ownership assets preferred: as 2015 looms, then, we continue to advise that for investors with average risk appetite, roughly two-thirds of a long-term balanced portfolio should comprise growth-related, compounding return assets, with the balance in a range of diversifying assets offering some portfolio insurance and ballast. Generally, we prefer corporate investments to government securities, and ownership (equity) to lending (bonds). A setback in stocks remains overdue: October’s swoon was reversed without the US market breaking below the 10 per cent correction level, and it is now more than three years since we saw a double-digit setback.
But on our reading of the economic climate and valuations, short-term volatility is an opportunity to build out the return asset component of long-term portfolios. We do not follow conventional, rigid top-down asset allocation templates, but our macro views favour both US and euro area stocks ahead of most others. We have little conviction in either direction on Japan and Abenomics; and we think the UK large company market is likely to continue to lag, given its heavy resources (oil and mining) content, though we do prefer it to gilts.
We are largely indifferent with respect to emerging stocks versus developed ones: expectations for the former are higher, and so more difficult to beat, and capital outflows are possible when US rates start to rise. We favour emerging Asia, but remain wary of the commodity-focused Latin American, South African and Russian markets.
Technology; capital spending; the US housing market and financial rehabilitation; M&A; and – for risk-tolerant investors only – euro area banks are some more focused investment ideas consistent with our mid-cycle, muddle-through outlook.
Within bond markets, as noted we’d favour corporate bonds over governments, but on the expectation in many cases of holding them to maturity because of that lower liquidity. In the US and UK markets we’d advise short duration. Our currency views are less strongly held. The dollar has already rallied, and is now the overwhelming consensus choice, which is unsettling. However, the scale of divergence in the business cycle and monetary policy between the US (and the UK) on one hand, and the euro area and Japan on the other, is too big to ignore, and neither the dollar nor pound yet looks especially expensive. Sometimes the consensus is right, and we continue to rank the dollar and pound (in that order) ahead of the yen, the euro and the Swiss franc, even though the yen in particular is (as noted) now looking undervalued.
And as we suggested last month, talk of the Chinese yuan replacing the dollar as the world’s major transactional and reserve currency in the foreseeable future remains fanciful. Finally, we noted last month that the decline in oil prices is a further illustration of the fading of the commodities ‘supercycle’: commodity prices are not a one-way bet upwards, even though global resources must be finite. We do not advocate direct investing in commodities (strictly speaking, commodity futures, since most commodities are not directly investable) generally, nor would we yet be tempted to bottom-fish the stocks of the oil and other resource-extracting sectors.
And now the result of a Swiss referendum has reminded us that gold too has lost some of its lustre of late – it is down more than a third from its 2011 peak. If business and banking systems are indeed moving slowly back towards normal, and if some key interest rates start to rise, the immediate case for gold may have been weakened. Meanwhile, it is not always a good inflation hedge; because it carries no income, it is difficult to value, and cannot be compounded over time; and it does not always diversify portfolios. The world economy and financial system was not stronger when currencies were pegged to it, a point perhaps registered by those Swiss voters as they decided not to make their central bank buy more.