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Rothschild Wealth Management Likes Tech, Uses Hedges As Risks Swirl

Tom Burroughes

5 September 2013

The global economy appears to be warming up, with better-than-expected China data offering some cheer, while volatile financial markets have jolted some complacent investors and knocked prices to more realistic valuations, Rothschild Wealth Management said in a monthly note.

Conditions remain uncertain, the firm said, citing risks such as Germany’s federal elections due on 22 September, the tapering, or ending, of the US Federal Reserve’s hefty monetary stimulus and the violence in Syria. Rothschild added that the issue of China’s credit bubble is “perhaps the greatest threat to global growth and we believe it could burst at some point. We will continue to protect portfolios during this uncertain period”, the firm, in a note by Dirk Wiedmann, head of investments, said.

Although Rothschild Wealth Management said its broad investment stance remained steady over the past month, it highlighted three important areas:

-- There is an investment case for holding large technology companies. Additionally, activist investors have a number of targets in this sector, which could add further value;

-- Rothschild Wealth Management said its move last month to protect portfolios using equity put options with a preference to hedge the US market “has worked well against the recent correction”;

-- It says that despite a lack of any clear developments in Japan, RWM is “inclined to give Abenomics the benefit of the doubt and believe the country’s economic recovery is likely to continue”. (The reference is to Shinzo Abe’s aim to reflate and boost the Japanese economy.)

The wealth management firm said equities and real estate offer some protection against inflation at a time when central bank policy is in “uncharted territory”.

It argues that shares in leading global businesses are “fairly valued” and pay strong dividends, so are an attractive area.

As government bonds often cannot be relied upon to defend capital in tough markets, given ultra-low yields and associated risks, Rothschild Wealth Management is using specialist hedge funds and option strategies to mitigate risks.

On Japan, the firm said valuations for Japanese equities are “generally neutral” but the market looks cheap on some yardsticks, such as the price-to-book ratio measure.

“In our view, a weaker yen and negative real interest rates could trigger a further re-rating of Japanese equities over the next 12 to 18 months,” it said.

By constrast, Rothschild Wealth Management said it is avoiding cash – due to negative returns – and high-quality government bonds, where yields are insufficient compensation for risks.