“What has been a struggle for us is the strengthening of the dollar. We’re surprised how vigorously the Trump administration is pursing the topic of trade and surprised that it has strengthened the dollar as much as it has,” he said during a media briefing in Hong Kong last week.
The wealth manager did not anticipate that the US dollar would appreciate by 3.3% since the start of the year, a move that has hit client investments in emerging market currencies, equities and sovereign bonds.
“The biggest change in our tactical positions would be taking off the overweights that we had in currencies outside of the dollar,” Haefele said, adding that these positions are now neutral.
Additionally, the overweight in emerging market equities was taken down to neutral.
State Street Global Advisors and Eastspring Investments have also recently taken note of the appreciation of the US dollar and have made changes in their tactical asset allocations.
Hedging global growth
For client portfolios, the bank continues to prefer global equities over high grade bonds on the back of global growth and strong company earnings, he said. For tactical global equity exposure, the firm weighs allocations relative to the MSCI AC World Total Return Index.
However, some hedges have been added amid rising volatility in the market as well as increasing interest rates.
For example, it has added an S&P 500 put in its tactical allocation this year. “We thought it was prudent to give up some of the future returns and try to put a little bit of flooring if we really get a sell off,” Haefele said.
“Because with the great run of markets last year together with the diverging political views in the United States and the tightening of global liquidity, we thought that the range of outcomes for the global economy is much wider, so we wanted to have some protection there.”
Besides its put on the S&P 500, the bank has also allocated around 14%-18% to hedge funds. UBS Wealth is one of the private banks that recommends clients allocate to hedge funds as a diversifier.
“We note that hedge funds tend to perform well in a rising rate environment, and they did so at the beginning of the first half of this year,” Haefele said.
As of the end of May, the HFRI Fund Weighted Composite Index returned 1.41%, versus S&P 500’s 2.02% and Bloomberg Barlcays Global Aggregate’s -1.02%, according to data from FE Analytics.
Still positive on Asia
Echoing Haefele, Tan Min Lan, Singapore-based Asia Pacific head of the firm’s chief investment office, said that the strengthening of the US dollar could negatively affect Asia assets.
“If the dollar were to rise sharply from here, it could be a drag on Asian assets,” she said during the media briefing. However, she believes that it is a “very manageable risk”.
“So long as earnings are stable and valuations are moderate, Asian assets can actually continue to perform.”
For the full year 2017, the MSCI Emerging Markets Index was up about 38%. Year-to-date, there’s been a sell-off. The same index is down (-6.5%), but the MSCI All Country Asia ex-Japan Index had less of a loss (-4.1%).
Tan expects Asia company earnings to increase by 12% this year. She added that balance sheets are generally healthy and most companies have positive cash flow. Within the region, she likes China and Singapore.
“We see the most upside in the Chinese equity markets. In China, industrial profits are up 15% this year,” she said.