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An investment chief for Lombard Odier says a rise in volatility could knock 10% off the S&P 500 in the next six months. He breaks down the 10 ways to shield, or boost, a cross-asset portfolio

  • Stephane Monier, who is chief investment officer for Lombard Odier, breaks down the forces coming into play in H2.

  • He says coronavirus, inflation, and geopolitical uncertainties will stir up market volatility.
  • Here are Monier’s 10 investing tips for the second half of 2021.

Market volatility has all but disappeared as global economic recovery has taken effect, even with the recent flare-ups in cases of COVID-19 in various parts of the world. Global stocks are trading at all-time peaks and Wall Street in particular is riding high.

However, as the world emerges from the pandemic and governments and central banks grapple with how and when to wind down their multi-trillion dollar economic support programs, volatility is likely to return and could put a serious dent in the equity market bull run this year, according to Stephane Monier, who is the chief investment officer for the Swiss private bank Lombard Odier.

“We focus on this balance between recovery and pandemic, inflation and policy support,” Monier said. “These tensions will create more market volatility.”

“Reviving economic prospects also bring uncertainties around unwinding monetary support, economic overheating and run-away inflation,” he said.

Monier pointed to the fact that the VIX, which measures S&P 500 volatility, is currently trading at just above its pre-pandemic level of 15%. He said this volatility level should encourage some caution, but also will create opportunities for bolder investors.

“In case of market falls, which in our view could range between 5% and 10%, put-spread strategies can be very effective protection,” Monier said. “We believe this approach is also consistent with an environment in which it makes sense to take advantage of dips to increase equity exposure.”

This is why Monier is recommending that in the second half of 2021, investors should stay invested in risk assets and bank on the continued overperformance of the cyclical and value stocks that have been very much in vogue since late last year.

“This scenario supports cheap, recovering equity sectors, particularly within energy, financials and automakers,” Monier said. “While most cyclical stocks are now trading higher and offer a more balanced risk/reward, value names will be supported by above-trend economic growth.”

Monier also advises his clients to concentrate equity allocations on European and UK stocks. He believes firms in this region are set to benefit most from the end of lockdown restrictions, and that many European stocks are still under-valued compared to the S&P 500.

Monier argues that the current macroeconomic recovery, coupled with widespread stimulus packages, should encourage investors to favor equities over bonds. He believes the yield on the 10-year US Treasury will reach 2.25% over the next 12 months, from closer to 1.45% right now. 

“Given this, we favor low exposure to government bonds, as well as a defensive portfolio duration,” he said. “Improving economic growth is likely to support corporate credit fundamentals in both developed and emerging markets.”

For currency traders, Monier’s advice is to use carry strategies to generate income. This refers to when investors borrow a low-interest rate currency and convert the borrowed amount into a currency with a higher interest rate. 

He predicts the US dollar will depreciate by up to 20%, due to “ongoing improvements in global activity and trade, both of which historically trigger dollar weakness.” Instead, Monier prefers the Chinese yuan, with the necessary conditions still in place for strength in the currency.

In volatile conditions, investors tend to favor gold as a safe haven asset. However, Monier advises investors to underweight gold in their cross-asset portfolios.

Lombard Odier analysts predict that gold will trade around $1,600 an ounce by the end of 2021, a 10.4% fall from around $1,785 currently, under pressure from the expected rise in nominal interest rates.

Monier instead advises his clients to invest in infrastructure, which is set to benefit from the global effort to “build back better” after the pandemic, funded by vast government spending.

“The Biden administration’s historic spending plans and the EU’s NextGeneration recovery fund, promise strong inflows and investor interest in more sustainable infrastructure,” he said. “We retain our overweight allocation to infrastructure investments as this asset class is poised to be one of the main beneficiaries of governments’ post-pandemic spending.”

Lastly, Monier says that investors should be proactive in investing in the transition to a net-zero economy, including stocks with strong environmental, sustainability and governance (ESG) metrics.

“The pandemic continues to underline social inequalities and the threats to our changing climate,” Monier said. “Long-term, we see unprecedented opportunities for our clients to invest in the transition to a net-zero carbon economy.”

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