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#Market Strategy — 15.01.2019

Volatility: Adopting Cautious Strategies Via Defensive Investments And Real Assets

THEME 1

The year 2019 will be marked by the normalisation of monetary policies and the impact on liquidity. Thus, volatility may cause trouble on the financial markets. Certain assets considered as defensive and other unlisted assets will be more suitable for investors with a more cautious risk profile.

Investment Theme 1 | BNP PARIBAS WEALTH MANAGEMENT

OUR RECOMMANDATIONS

This theme is aimed at investors with a more cautious risk profile.

For all investors, regardless of their reference currency. It covers investments in:

For investors whose reference currency is the dollar, we recommend US short-dated bonds.

For investors whose reference currency is the euro, we recommend real estate assets.

For all investors, regardless of their reference currency 

Alternative strategies (Newcits funds)

Global-Macro fund managers are in the best position to benefit from a normalisation of monetary policies and rising interest rates. Among other, they should benefit from the lag in economic cycles between the US and Europe, the latter being still vulnerable to several political risks (e.g. Br scmk exit, Italy, etc.). "Macro" strategies largely seek to benefit from changes in stock market indices, interest rate movements in addition to volatility in commodity prices or currencies. These may be positive or negative trends, because such strategies require a certain stability in these trends to allow fund managers to create value.

After a long bull market in some equity sectors, supported by extreme monetary policies, the withdrawal of liquidity and rising interest rates will likely reveal an overvaluation of some over-indebted and low-quality companies.

"Long-Short" fund managers can benefit from these situations by simultaneously taking "long" and "short" positions (a strategy consisting of betting on the fall of a share price and on the rise in the price of another share or group of shares). This helps to limit the portfolio's sensitivity to a general fall in equity markets or to a rise in interest rates. Certain Newcits funds are managed with a level of risk in line with bond funds. However, the expected returns for Newcits funds are higher in the present context than for bond funds. 

Structured products 

Structured products typically involve the use of sophisticated instruments (futures, options or credit default swaps) to which individual investors usually have limited access

These instruments can be used to optimise the return or limit losses while reducing the sensitivity to a rise in interest rates. We recommend investing in short-dated defensive products (typically between 1 and 3 years). In other words, it is better to focus on investment products offering full or partial protection of the invested capital

The underlying assets may consist of various types (oil, gold, equity indices, interest rates etc.)

Rural land

Rural land offers an attractive alternative to investors seeking to diversify their portfolio. These assets are not correlated to the financial markets and provide revenue which is usually indexed, while potentially offering long-term capital appreciation

Agrifrance, a department of BNP Paribas Wealth Management, specialised in rural real estate transactions in France, advises clients (on both the buying and selling side) as well as executes and facilitates transactions involving farms, vineyards, forests and country estates. It also assists buyers in their search for real estate management solutions.

For investors whose reference currency is the dollar, we recommend

Short-dated US bonds

They have become attractive for dollar-based investors thanks to the rise in bond yields. This is not the case for investors whose reference currency is different from that of the dollar because the cost of currency hedging is high. US bonds with a short maturity (1-3 years) offered in late 2018 an annual yield of 2.8% (sovereign bonds) and a yield of between 3.0% for AAA-rated corporate bonds (the safest) and 3.5% for A-rated bonds. The default rate or debt restructuring risk is very low given their quality.

We believe the market has already priced in most of the rate hikes planned by the US Federal Reserve in 2019. The risk of a sudden and extended rise in short rates is therefore low, limiting the risk of these bonds losing value. 

For investors whose reference currency is the euro, we recommend

Real estate assets

An important factor for direct (commercial and residential) investors is that real interest rates do not increase substantially, which is not necessarily the case for nominal rates. If interest rates rise in sync with economic growth, and as a result, underlying inflation goes up, this may be a positive factor for real estate. In the event of higher inflation, homeowners in many parts of the world would be entitled to raise rents (indexing/rental adjustment). Higher rents would eventually push up values, taking into account the usual lag of 6-18 months.

MAIN RISKS

Liquidity risk. Unlisted assets (real estate and rural land) are by nature long-term investments, which may be illiquid.

Interest rate risk. If rates rise, bond prices go down in value. Short-dated bonds are, however, less exposed to this risk. Unlisted assets are penalised by a rise in real rates.

Default/restructuring risk,  if the issuer is unable to redeem its debt. This is why we recommend focusing on quality issuers..

Graphique - Rendements Obligataires à 10ans - Thème 1