Private bankers favour alts following Trump victory
Alternative asset classes are likely to emerge as favoured investment destinations with high net worth individuals in the uncertain months following Donald Trump's victory in the US presidential election, according to several wealth managers.
In the day following Trump’s victory was revealed in Asia, Switzerland's Union Bancaire Privée (UBP) announced that it is overweight in alternative classes, including hedge funds.
"While a Trump presidency creates new uncertainty in the global economy and global markets, a strong economic backdrop in the US combined with near-term policy tools should be enough to keep US growth on track," co-wrote Norman Villamin, chief investment officer, UBP Private Bank, in a market commentary published after Trump's win.
"Elevated valuations in both government bonds and equities suggests attractive risk-reward opportunities remain in alternative asset classes, such as gold, hedge funds, risk premium strategies and structured products while tactical opportunities may present themselves once valuations reset more fully.”
UBP has been overweight hedge funds over the course of 2016. The funds have been poor overall performers for years, which has led to increased skepticism among HNWIs and institutional investors as to being heavily allocated towards them. However, UBP argued that well-managed hedge funds should provide cushion for the volatility in equity markets, just as they did around the Brexit referendum in June.
"Moreover, the increase in volatility should also restore the structured-product, volatility-carry opportunities in the markets which had been absent, with the low levels of the CBOE SPX Volatility Index (VIX) since June," Villamin wrote. The CBOE SPX Volatility Index is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices.
Noah Holdings, a Chinese wealth manager, concurred that more policy uncertainty would create opportunities for hedge fund managers. It predicted that macro managers would benefit the most from opportunities in market uncertainties, while relative value managers would enjoy the least investment upside.
"We expect global allocators will be less risk-off compared to before election, and money will flow from US and Europe to Asia when investors look for growth opportunities," William Ma, chief investment officer at Noah Holdings, told AsianInvestor.
Ma said he hasn't seen any knee-jerk reactions coming from clients so far, in the day since the US election result. "People are uncertain about the policies [such as the de-globalisation and tearing up of trade treaties that Trump had talked about during his campaign] and the details about how these policies would be implemented."
"If you look at the equity market it is a quick v-shape rebound," Ma noted, which indicated that investors have not been in sustained panic mode.
Bryan Goh, chief investment officer for Asia at Bordier & Cie, noted that while in the short-term investors were trading “emotionally or mechanically as opposed to analytically”, over the long-term effects of a Trump presidency were very hard to predict.
That said, the president-elect’s stated desire to shift away from monetary stimulus via the Federal Reserve and instead invest heavily into a multi-billion dollar infrastructure package, plus his stated desire to unwind free trade agreements both promise to be inflationary. Goh noted that this did not particularly change the momentum of interest rates in the US.
“I’m not sure that [Trump’s policies leading to inflation] would have that much impact as we were looking at rising rates anyway,” Goh said.
He argued that while the complete domination of Congress and the presidency by the Republican party was not a good thing, as it risked there being too little compromise on legislation, “there is only so much that a president can do for or against his economy”.
“Ultimately our approach to the US is unchanged. Equities are good but expensive, credit is okay but high yield is too expensive and you want to buy credit but not duration,” Goh noted. Again, the ultimate answer appears to be seeking value in less mainstream parts of the market, be they in emerging markets or alternatives.
“It’s hard to tell whether it’s more risky or not, but we are looking at less accessible parts of the market,” said Goh.
Eurozone unrest
Private bankers appeared to have little agreement over the importance of the election of Trump, coming just over four months after another surprise vote in the form of the UK’s Brexit.
Ma argued the Brexit result was somehow like a rehearsal to the US presidential result, and noted that both events measured less panic from investors.
"To me it [Trump's victory] is not a black swan event, and so was not Brexit. So in that regard, I don’t see any big shift in our clients' asset allocation."
Goh was less sanguine. “Rational people in Brexit and the presidential election were saying ‘what were you thinking?’ but many voters were effectively saying ‘we want anything but this. We’re not sure what we wanted but not this’.”
The danger, he noted, was that other electorates take this angry, populist and unfocused mindset into other upcoming elections, including Italy’s constitutional referendum on December 4, and then the French and German elections in 2017, with France’s National Front promising a referendum on the European Union if it wins.
“These are more opportunities to voice dissatisfaction,” Goh said. “We have already had two data points [in similar circumstances] and can draw a line.”