After the environment for the financial markets has almost been ideal in recent years, the picture is gradually cracking right now. Investors should put their portfolio to the test.

Phases with above-average price gains have been recurrent in the history of the financial markets. The peculiarity of recent years is that both equities and bonds have risen sharply over a longer period, while inflation has been extremely modest, unlike in previous boom phases.

As pleasing as the gains of recent years have been for investors, they prove to be a burden for the future. The increase in valuations associated with higher prices reduces future potential returns. But the capital market environment is also changing. Leading the way is the U.S. Federal Reserve (Fed).

See the Risks

After eight interest rate moves, it is approaching neutral levels. In addition, since fall 2017, it has gradually reduced the reinvestment volume. Thus, it is the first major central bank to reduce its sharply higher balance sheet in the wake of the crisis.

In view of the changing capital market environment, the focus should increasingly be on potential risks. The process of dismantling the expansive monetary policy measures itself poses a major challenge. Although the normalisation of U.S. monetary policy has so far been largely problem-free, it is unclear whether this will be the case if other central banks follow suit and also adopt a more restrictive stance.

Cheap Money

This could lead to significant skid marks. The cheap money has also caused global debt to grow above the level of the financial crisis. This increases the vulnerability of the economy and the state to rising yields. Although there are no immediate signs of a recession, the likelihood of a slowdown in economic activity increases with as time goes on.

Such a setback does not have to be as strong as the financial crisis of ten years ago, but given the higher debt burden in many countries and/or the still expansive central bank measures, there is limited fiscal and monetary space for countermeasures. The different income distribution leads to successively increasing dissatisfaction in large parts of the population and threatens social cohesion. There are already tendencies towards protectionism and nationalism in many countries.

Not Being Invested a Bad Option

The risks identifiable on the horizon sometimes lead investors to withdraw completely from the markets. However, it is still unclear whether, when and in what form these risks will occur. Rising risks and higher volatilities do not lead directly to negative returns, especially as the fundamental environment is currently robust.

Numerous studies show that investing in the long run pays off, as the investor receives compensation in the form of a return for bearing the risks. A too early exit from the markets carries the risk of significant opportunity costs in the form of lost earnings. A long cash attitude, however, also brings a creeping expropriation in the form of a loss of purchasing power.

Pay More Attention to Risk Management

As a result, we encourage investors to remain invested in principle but to take a closer look at portfolio risk, allocation weights and positions. The strong gains of recent years may have significantly changed the composition of a portfolio.

Investors should therefore pay more attention to risk management. However, it is also important to take advantage of opportunities. If market activity becomes rougher, at least temporarily, this also offers opportunities.

Conclusion

After a long period of strong price gains, the air in the financial markets will be thinner and the expected growth smaller. The dominant reflation policy of the central banks is gradually ending. At the same time, risks gradually start to appear on the horizon, even if the fundamental environment remains constructive for the time being.

Investors should remain invested, but ensure that their portfolio can survive even more difficult market phases. It is important to identify and calibrate risks and to take advantage of the opportunities of the advanced cycle. As part of a portfolio check, VP Bank assists the clients in identifying and calibrating risks as well as taking advantage of the opportunities offered by the advanced cycle.

Investment Tips

  • Avoid (too) one-sided or aggressive positioning as well as lump risks.
  • Sell risky but largely non-dividend investments.
  • Do not make too many concessions on bond quality to generate regular returns.
  • Replace stocks of high-debt and low-cash companies with high quality stocks.
  • Mix diversifying assets such as gold, U.S. government bonds, or bond alternatives with a low dependency on the economy.

Thomas Rupf is Deputy CEO VP Bank in Singapore and Head of Investment Advisory & Treasury Asia. Views expressed above are the author’s own views and should not be taken as a representation of the bank’s official position on any legal or regulatory matter.

VP Bank Ltd was founded in 1956 and is one of the largest banks in Liechtenstein with 892 employees at mid-year 2018 (full-time equivalent 828). It currently has offices in Vaduz, Zurich, Luxembourg, Singapore, Hong Kong and Road Town on the British Virgin Islands. VP Bank Group offers bespoke asset management and investment consultancy for private individuals and intermediaries. Due to the open architecture, clients benefit from independent advice: The products and services of leading financial institutions as well as in-house investment solutions are included in client recommendations. VP Bank is listed on the Swiss stock exchange SIX, and has an "A" rating from Standard & Poor’s. The bank has a sound balance sheet and capital base. Its anchor shareholders take a long-term view, guaranteeing continuity, independence as well as sustainability.

VP Bank Ltd Singapore Branch is a boutique private bank with a client-centric business philosophy and is the Asian branch of the Liechtenstein-based VP Bank Group with more than 70 employees. VP Bank Ltd Singapore Branch provides specialised wealth management solutions and family office services for high-net-worth clients and professional asset managers. VP Bank Ltd Singapore Branch is dedicated to the protection and growth of clients’ wealth. The bank offers a holistic suite of services and advisory, not just in wealth management, but also in inheritance planning, structuring of trusts and foundations, as well as art and philanthropy. Apart from private wealth management, VP Bank Ltd Singapore Branch provides comprehensive services for asset managers and other financial intermediaries. The service offering comprises a trading platform, banking services including ebanking and mobile banking and operational support. Partnership arrangements with professionals include tailor-made investment advisory, discretionary management solutions and custodian services.