“The main aim is to avoid any accidents related to rising interest rates”

Le Temps (20.04.2022) - The war in Ukraine has created a highly unusual environment for investors, writes Michaël Lok, Group Chief Investment Officer at UBP.

In 2022, should investors “sell in May and go away” as the old stockmarket saying goes? The current situation is particularly uncertain, due to a combination of factors: the post-Covid return to normal, the war in Ukraine, high inflation, lockdowns in some regions of China that are disrupting international supply chains, not to mention central bank rate hikes, and equity and bond markets that are showing losses for the year to date. Some observers believe that selling in May this year would protect them from upcoming difficulties. That opinion is not shared by Michaël Lok, Group Chief Investment Officer at Union Bancaire Privée (UBP).

Should investors be preparing to “sell in May” and remain on the sidelines of the markets?

The first thing to understand is that investors have been dealt an entirely new hand in 2022. The situation has changed very quickly, with inflation as an aggravating factor. We knew that the first half of the year would be complicated, after two years of a strong post-Covid recovery and with central banks normalising their monetary policies. We expected some inflation, and we expected slower growth in the second half of the year, along with fairly solid corporate earnings, in slightly stretched market conditions. That did not constitute a reason to sell in May, but the war in Ukraine has changed the whole situation.

How?

It has led to even greater inflationary pressure. The key factor will be how central banks, and the Fed in particular, bring interest rates back to normal in an inflationary environment.
US long bond yields have risen a lot in the last few weeks, but equity markets have only fallen 6–7%. On a historical comparison, that is not much of a decline in a situation like this, which shows how robust equity markets are. The question is whether increases in short-term interest rates, which are necessary to combat inflation, risk causing a sharp economic slowdown in late 2022 and 2023, and we have not yet made up our minds about this.

So how should investors position themselves in the markets?

We are not planning any tactical investments in May. We reduced our equity exposure in late 2021 and we have been neutral since then. [Editor’s note: at UBP, a balanced portfolio has a 50% equity weighting]. But we have significantly increased our investments in hedge funds, particularly those with credit arbitrage strategies. These were almost absent from our asset allocation, whereas now they have a weighting of around 15%. We are certainly not going to move into cash, and we would advise against trying to engage in market timing: investors should know their limits.
However, we have also taken out hedges on our equity positions, with maturities until December, allowing us to protect against potential bad news this year. The outlook for equities is neutral or slightly negative, and the main aim is to avoid any accidents related to rising interest rates.