Lombard Odier has increased its weighting to hedge funds and slightly lowered its fixed-income weighting, according to its latest investment strategy update.
The Swiss private bank noted that following the recent bout of volatility, hedge funds, particularly, non-directional strategies, were poised to do well.
Meanwhile, in terms of fixed income, it favours corporate issuers over government bonds because of its concerns around duration.
In terms of equities, it favours the US over other markets despite the recent rally in European stocks.
Overall, the bank noted that volatility would likely remain elevated going forward, which would support active management.
“This is a time to be vigilant and active in investment portfolios. We enter this period of high volatility with an investment strategy that is broadly diversified and tilted towards continued growth and US policy changes,” it said.
In terms of equities, Lombard Odier noted that US-led growth, the global monetary easing cycle and strong corporate earnings were positive for the sector.
It also added that the investor exuberance that characterised late 2024 appears to have faded, thus justifying keeping its exposure to riskier assets above typical levels.
Among sectors, the bank is currently neutral on technology as it thinks there will be both winners and losers with the AI boom, while the exposure of the European market to AI through industrials and semiconductors further buttresses its preference for the US.
Conversely, in Asia, it views Japan as an important diversifier because of its lower exposure to the AI theme, while it is overall neutral on India and China, noting that recent corrections have not been sufficient to make entry points attractive enough.
In fixed income, while the bank expects bond yields to decline over the course of the year, it is still predicting some volatility in longer dated yields led by US policy uncertainty hence its preference for high-quality corporate bonds over sovereign debt.
It backs US dollar-denominated bonds with a maturity exposure of three to five years, while in Europe, it notes that the European Central Bank and Bank of England are likely due to cut further so it prefers slightly longer maturities there.
In terms of sovereign bonds, it prefers German and UK debt, noting that while German and UK bond yields have moved higher in sympathy with US rates, in both cases sovereign credit risk is manageable and current yields offer attractive entry points.
