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Perspectives

Stronger portfolios for turbulent times

David Bailin

By David Bailin

Chief Investment Officer

June 7, 2019Posted InEquities, Fixed Income and Investment Strategy

Financial markets have had a turbulent six months. They began 2019 by rebounding strongly from the severe late-2018 sell-off. In May 2019, however, the escalating US-China trade war and renewed slowdown fears caused them to surrender some of those gains.

Markets are now reflecting an increasingly unsettled world trade situation, as well as greater political polarization, such as that which we saw in the EU parliamentary elections. Rather than watching the news and taking no steps, we are reiterating a ‘call to action’ for investors. The central message of Outlook 2019 – published on 5 December – was to safeguard assets by building strong portfolios for turbulent times. Stronger portfolios should contain higher quality, global fixed income securities, equities with earnings and dividends less likely to be impacted by trade, and alternative investments that diversify portfolios for the long term. Hedging portfolios may have become more expensive, but that doesn’t mean hedges are expensive relative to risk. Our other message of making cash work harder means investing in a broad and diversified selection of bonds and cash alternatives, rather than assuming that ‘cash’ is the best way to manage your portfolio in turbulent times.

Mid-Year Outlook 2019 is our roadmap for the rest of this year and beyond. ‘Stronger portfolios for turbulent times’ reflects our belief that the global economy and markets have successfully navigated the acute difficulties they faced in late 2018 and early 2019, particularly because of the US Federal Reserve’s retreat from monetary tightening – see our article Flying just above the danger zone. They now face the renewed threat of trade protectionism once again. However, if policymakers move to contain this risk too, we think that economic growth and market upside can endure into 2020.

Many investors are still apprehensive, but we make the case for keeping portfolios fully invested. Rising earnings and the late-2018 sell-off have combined to lower equity valuations. We also see inflation staying contained and credit risks easing. Nevertheless, we are far from complacent. We acknowledge a variety of important risks, especially that of worsening US-China trade tensions – see Investing wisely in 2019 and beyond. Our approach therefore stresses seeking new opportunities and simultaneously moving portfolios towards safer ground.

As well as our roadmap, we offer practical steps for implementing our advice. Intelligent opportunities for your portfolio highlights examples of strategies you might consider in today’s late-cycle environment. They include seeking ongoing market upside while hedging downside risk as well as diversified equity exposure to our investment themes. We also explore certain vital disciplines that some of the world’s most successful investors have consistently followed, showing how we can help apply them to your wealth – see How we do what we do. Citi Private Bank remains your partner and guide throughout turbulent conditions.

Please click here to visit our Mid-Year Outlook 2019 homepage.