Hu Yifan, UBS
“As the global economy continues to grow under a normalising inflation rate, cashing out of investments is not a wise option,” Hu said during a media briefing in Hong Kong. “It will potentially lower your purchasing power.”
Investors should also consider the late period of the cycle. “Historical statistics show that returns generated from the first and last year of a bull cycle tends to be higher than the middle year.”
Citing the bank’s research, she said since 1928, the S&P 500 Index delivered on average a 40% annualised return in the first year of a bull market, 11% in the middle and 22% in the last.
The average return during a bear market was -30%, she added.
Risk scenarios
Hu listed five main risk scenarios for the markets and their potential impact on specific asset classes, and noted the biggest risks remain trade protectionism and rising oil prices.
She estimates there is a 20-30% possibility that the Trump administration will initiate a full-scale trade war. US-China trade tension will be long-lasting in a “fight-talk-fight-talk” pattern, which may impact markets.
To manage risk in such an environment, the bank advises clients to add alternative investments to reduce correlated exposure as volatility increases.
Hu said investors can allocate part of their assets to hedge funds, which also tend to perform well in the later stage of a bull market.
According to the bank’s research, during the last three rate hike periods, the HFRI Equity Hedge Index, the Fund Composite Index and the Event-Driven Index all generated double-digit annualised returns, outperforming the S&P 500 Index.
Hu also suggested investors should seek a mixed source of return, such as diversifying the portfolio with put options, products that yield dividends, as well as those investing in long-term themes.
She believes long-term investment, which includes sustainable investing and private equity, can ease risk during the current market cycle.
DBS Bank advised clients to manage their portfolio in a less proactive way, FSA reported earlier. Investors are advised to take profit from part of their equity holdings and wait for future investment opportunities, according to the bank’s chief investment officer Hou Wey Fook.
He believes that cashing out of equities is a sensible decision amid market volatility caused by US-China trade tension. The bank, therefore, has upgraded cash to overweight (7%) from a neutral (5%) for the third quarter of 2018.
UBS’ risk scenario and affected asset classes
| Risk scenario | Probability | Potentially negatively affected asset classes |
| Oil supply shock | 20-30% | · Japan, Eurozone, Asia equities (commodity-importing countries) |
| Trade war | 20-30% | · Emerging market currencies
· Mexico, Japan, Germany equities (countries that have large trade surpluses with the US) · Korea and Taiwan equities (countries that are linked to the US-China supply chain) |
| China credit crunch | 10-20% | · Asian assets
· Global commodities |
| Federal Reserve ends the cycle | 10-20% | · US and global equities
· Developed market high yield bonds · Emerging market credit · Energy and base metal commodities |
| Military escalation in North Korea | 10-20% | · Asian equities
· Korean won |
