Against the backdrop of the current macroeconomic environment, Howie Li (pictured), CEO, Canvas, ETF Securities, is encouraging investors to think deeply about future proofing their portfolios.
“The unconventional policy steps which central banks took from 2008 onwards has had knock-on effects to the valuation of assets and this continues to create big challenges for investors. At the beginning of the year, investors were concerned about inflation, how much longer the equity markets could continue to perform strongly and about Brexit as well as geopolitical risk generally. Not much has changed over the year but these remain drivers for uncertainty at a macro level,” Li says. “Accordingly, investors seem particularly focused on uncorrelated returns and risk mitigation through diversification.”
Li says that the strong equity market performance and relatively low volatility has created a risk-on atmosphere. Nevertheless, he says investors are increasingly aware they must prepare for this equity rally to slow down, particularly as central banks try to withdraw from asset purchases.
“Interest in broad commodity exposure has increased this year as investors factor in an asset class that has a low correlation to equities and bonds,” he says. “If 10 per cent of your portfolio is in broad commodities against 60 per cent in equities and 40 per cent in bonds, that has historically reduced volatility and the size of drawdowns in a portfolio.”
Li also believes that, in the current environment, `future-proofing’ also involves looking carefully at emerging long-term trends. “The risk on appetite also means people are diversifying their portfolio to include thematic investing, where returns can be captured through exposure to assets linked to long-term structural trends. We’ve seen a surge in appetite for cyber security and robotics and automation products, which have seen strong inflows and performance this year.”
“Those portfolios are predominantly in small to mid-cap companies which provide a high-growth exposure. Of particular interest to investors though is the underlying growth trend of increasing automation in our daily lives and cybersecurity against data theft as the world becomes more connected. The growth of these are often driven by forces unconnected with the financial markets.”
Li says that, in five years’ time, automation will undoubtedly be a larger part of everyone’s life. “And cyber security will be more important because data are the building blocks of the modern world. These are the long term megatrends investors are attaching themselves to, with opportunities to track a precise theme executed through precise investments.”
With ongoing geopolitical uncertainty, some wealth managers have also kept a steady allocation to gold, which his firm believes is currently fairly priced. “Gold is perhaps the original hedge against market uncertainty and is often used by investors as a safe haven.”
“As it relates to ongoing inflation concerns, especially where it’s unexpected, investors are again examining broad commodities and precious metals for their inflation-hedging qualities. In addition, currencies such as the Japanese yen and the Swiss franc are often considered for their haven status as well.”
Finally, the search for yield continues apace, Li says. “Emerging market local currency bonds are looking increasingly attractive as the US dollar loses steam.
“On a fundamental basis, these countries are faring rather well and, on a currency basis, there is a relative undervaluation against the dollar. The continued search for yield has forced investors to take on wider considerations as to what will be included in their portfolio and we’re seeing more risk added to maintain desired yield levels.”