Rising volatility and central bank changes mean its time for new strategies, wealth managers say


With the trade war causing market volatility and central banks on a mission to tighten monetary policies, wealth managers are calling for a shift in investing strategies.

Still, they predicted that investors will likely face lower returns ahead.

Rainer Michael Preiss, executive director at Taurus Wealth Advisors in Singapore, pointed to how the environment is changing: volatility is picking up, and interest rates are rising and central banks are tightening.

Market volatility has been stoked by U.S.-China trade tensions, and the two major stock indexes in China have already lost one-quarter of their value from highs earlier this year.

“So far, everybody has been conditioned to buy the dip. In all honesty, that was the right strategy for the last couple of years when we had quantitative easing. Now interest rates are rising, and we have so-called quantitative tightening,” Preiss said.

Quantitative easing, which involves pumping money into the system, contributed to rising prices for stocks and bonds. Conversely, central banks’ reversing that process — known as quantitative tightening — decreases liquidity in the market, weighing on prices in the process.

Preiss, who spoke to CNBC on Monday, said that tightening will likely lead to lower returns for stock market investors.

“The returns are becoming less and risks are rising … The risk is rising with regards to the returns you potentially get from long-only equities,” he said, referring to the common investment strategy of solely buying shares that are expected to increase in value.

Deutsche Bank Wealth Management said in a Aug. 7 report that central banks’ attempt to normalize their monetary policy is likely to lead to “positive but rather lower returns in conventional asset classes (such as equities or corporate bonds) than the high levels investors have grown used to in the last few years.”

“At the same time, a period of abnormally low market volatility appears to be coming to an end,” the report added.

A change of investing strategies

In times of volatility, a more hands-on approach to investing often leads to better returns, experts said. A so-called active investing strategy for stocks can outperform the overall market by taking advantage of short-term price fluctuations, they said. Passive investors, on the other hand, are in it for the long term, and limit the amount of buying and selling within their portfolios. They usually invest in assets that mirror the composition of major stock or bond indices.

“I think in this environment, it would be prudent to raise cash, but also secondly, try to reduce passive investment strategies, (exchange-traded funds), and also go into investments that are active, where you have some ability to also raise cash, also have the ability to look into non-index stocks,” Preiss said.

He added: “Our portfolio construction has shifted into more flexible mandates, unconstrained strategies that potentially can benefit from higher volatility. Because I think whatever everyone seems to agree upon is that … volatility is rising.”

Hedge funds, for instance, might be a good alternative in this environment because they tend to experience less volatile returns, suggested Deutsche Bank Wealth Management.

Original Article