Please note: this article is more than one year old. The views of our CIO team may have changed since it was published, and the data on which it was based may have been revised.
Our experts explain why you need to be more selective about your equity investments at this stage of the economic cycle, and how they can help
We are late in the economic cycle. Historically, this has been a time of higher volatility but also attractive opportunities in equities, provided you know where to look. As the performance of different markets and sectors diverges – a trend known as ‘dispersion’ – you need to be selective in order to “Stay Invested But Hedge”. You also need to be active in the way you manage your portfolio, if you wish to seize remaining opportunities for growth while mitigating the higher risks involved.
One way to focus your equities is by considering which types of investments look likely to produce growth over the long term. This is something we do at the beginning of each year by naming ‘Tomorrow’s Themes Today’, our list of strategic long-term investment themes, which currently includes ‘Millennials’, healthcare, cybersecurity, infrastructure, smart mobility and artificial intelligence.
But what about the near, more volatile future? Our CIO team believes there is still “oxygen” in the equities markets, but where are these attractive opportunities to be found? In this, the last in our four-part series exploring how to ‘Stay Invested But Hedge’, experts from around Deutsche Bank Wealth Management offer their ideas and explain how they can help.
Use funds to focus on particular regions and sectors
Romy Cuadras, Global Head of Fund Solutions
As our CIO team recently pointed out, “US growth looks buoyant while emerging market equities will… benefit from strong underlying economic fundamentals – particularly in Asia”. So now is the time to consider whether enough of your portfolio is allocated to equities in these two regions.
Our Fund Solutions team can help you to identify fund managers who specialize in both these regions, and in the sectors our CIO team feels offer the best opportunities for growth. We can also advise you on how to select high-quality funds that are actively managed – something that can prove especially important in the late-cycle environment, when reacting quickly to market moves can help you to seize opportunities and mitigate risks.
Thanks to our open architecture, we can offer you access to a wide variety of fund providers based purely on our detailed analysis of their performance and strategies. We make it our business to gain an intimate understanding of each fund’s holdings and risk exposures, as well as the management style of the individual manager, to provide insights about how your equity allocations can be adjusted to give you the opportunity to meet your investment objectives while taking an acceptable level of risk.
And of course we will work with our partners in Wealth Management to ensure your portfolio remains appropriately diversified, based on your overall wealth needs.
Use structured products for selective equity exposure
Nick Stone, Global Head of Capital Markets
Structured products could help you to invest more selectively in equities, with features designed to enhance yield whether prices move up or down, and to preserve your capital if the market moves against you. Our Equity and Structured Product Specialists work with multiple issuers to tailor each structured product to the specific objectives and risk appetite of the client, combining their expert views on single stocks with the macroeconomic and sectoral forecasts of our CIO team.
It is only by reacting quickly to market moves that you can take advantage of heightened levels of volatility and dislocations within and between regions, sectors and equities. So, during this late stage of the economic cycle, it is vital to ‘stay close to the markets’. We do this by ensuring that we::
- Stay well-connected with issuers, who show us new ideas and pricings as these arise;
- Employ professionals with investment bank experience;
- Stay attentive to markets with pricing tools developed in-house, designed to identify opportunities and attractive changes in pricing; and
- Actively engage traders from the widest possible variety of sources (thanks to our open architecture) to get colour on liquidity and pricing anomalies.
Keep your portfolio unconstrained and appropriately diversified
Christian Nolting, Chief Investment Officer and Global Head of Wealth Discretionary
Our Wealth Discretionary service allows clients to stay appropriately diversified across different asset classes, as the investment cycle evolves. Not only will volatility levels change as we move through the cycle, but the degree and nature of correlations both between and within asset classes will also shift. Active management is therefore an important ingredient to portfolio management that tries to create an asymmetric relationship between risk and return in an unconstrained context rather than trying simply to outperform a benchmark.
For further guidance on how to ‘Stay Invested, But Hedge’, try watching the other videos in this series:
Alternatively, you can download a full copy of our ‘Stay Invested, But Hedge’ CIO Insights report here.