From an equity point of view, Cappetta thinks is best to “let the winners run”.
“We continue to like good, sound quality names, from general technology to med-tech to healthcare, pharmaceutical and robotics,” Cappetta told FSA.
He singled out China exposure as favourable, citing technology stocks, which include clean energy, healthcare, internet giants Alibaba or Tencent, robotics and semiconductors.
“China is really in its infancy, it has a long way to go in terms of the opportunities it can provide for clients.”
The bank summarises the recommended overweight stocks with the acronym FADES: F for feed the world, A is rising Asia, D, digital disruption, E, energy transition and S, shifting lifestyles.
The equity sectors to avoid, according to Cappetta, are utilities and telecoms. “With inflation pressure eminent and trade disputes causing upside risks of rising prices, we expect the Federal Reserve to continue with quarterly rate hikes during 2018.
“In a period of rising rates it would be wise to underweight or avoid bond-like proxies in the US equity market.”
Fixed income concern
Asset allocation for a moderate balanced portfolio at Julius Baer would be 40% each of fixed income and equities, he said.
However, since the beginning of 2018, the bank has been advising clients to hold more equity exposure than fixed income.
The aim is not to increase drastically the proportion of equities, which was similar to last year, but to avoid going strong on fixed income, Cappetta said.
With interest rates on a scheduled rise in the US, high yield bonds may be under pressure.
“US corporate yield has held up really well in this difficult environment. But if you have significant exposure to US high yield, it is time to look at either reducing or selling that and looking for another asset class.”
Julius Baer is especially negative on high quality corporate bonds and high quality European bonds.
“The European Central Bank has basically been a buyer of all those fixed income products. The risk/reward is not there to [justify] an allocation.”
He also recommends against taking more exposure to emerging market debt, both local and hard currency, “because of some uncertainties in the market, such as trade concerns, and the quantitative tightening” by central banks.
The bank is neutral on subordinated debt.
“However, spreads have widened quite a bit recently to make subordinated debt in the US and Europe an attractive investment option for clients seeking income within a diversified portfolio. An actively-managed fund which provides ample diversification would be the best route to take.”
Cappetta recommends maintaining this approach to fixed income as US interest rate hikes continue. Julius Baer’s forecast is that there will be two more interest rate hikes this year and probably one more next year.
“As we come to the end of that [2019] interest rate hike, or even before then, you have to rotate assets back to fixed income.” Cappetta said.
The bank has onboarded funds in the last three months that reflect this approach, though he declined to mention specific names. “But I can tell you that Julius Baer is active.”
