Investors should look at building a robust portfolio that can grow regardless of where the economy is heading, says speakers at the UBS CIO 2022 Mid-Year outlook live conference.
This involves taking steps to protect against the risk of stagflation and economic slump, as well as positioning for opportunities that could arise in a soft landing or reflationary scenario.
“One of the key takeaways [this year] is that there is no base case scenario,” says Iqbal Khan, co-president of UBS Global Wealth Management.
To illustrate his point, Khan cites that the world has moved against the consensus at the World Economic Forum in Davos, with the Russo-Ukrainian war taking place, ongoing Covid-19 pandemic as well as rising inflation and extended quantitative easing.
In terms of actions that investors can take, UBS Global Wealth Management head chief investment officer Asia Pacific Tan Min Lan says a very important first step is to build and manage liquidity buffers, which should be sized to meet three to five years of cash flow.
This is done to mitigate the risk of forced selling, earn yield and capture opportunities as it arises. The liquidity portfolio can consist of a mix of cash, short duration bonds and structured investments.
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Meanwhile, hedge funds can deliver performance even when stocks and bonds are falling in the stagflationary environment, adds Tan. For example, in the current year up to May, the benchmark hedge fund index was down by less than 3% compared to 12.8% for MSCI All Country World Index and 11.1% for the Barclays Global Aggregate Bond index.
The next step is to improve the resilience of one’s equity portfolio. To manage the risk of a more significant slowdown in economic activity, investors can add their exposure to “defensives” such as the healthcare sector as well as quality stocks, says Tan.
Investors should also consider investing in value stocks — UBS’ analysis shows that when inflation is above 3%, value stocks outperform growth stocks, regardless of the stage of the economic cycle. “Additionally, despite their recent outperformance, value stocks are still trading at a PE discount of about 47% to growth stocks globally, versys an average historical discount of around 29%,” adds Tan.
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Finally, investors should take advantage of the sell-off by building long-term positions in areas where structural fundamentals remain intact. They should also look at investing in the private markets, as investing in private equity following public market declines has historically been associated with strong returns.
“The average return on global growth buyout funds that are launched a year after a peak in public markets has actually averaged at around 18.6% per annum,” says Tan.
To sum it up, striking the right balance between protection and growth is personal to each investor, says Tan. “And in uncertain times like this, we need to take proactive steps, both to manage the potential fallout and also to capture opportunities that could arise,” she concludes.
