Faced with the raging fear of a new economic crisis on the horizon, the first alarm signal is the decline in consumption by businesses and households, as well as that of investments. A situation that generally tends to increase the reserves in deposit accounts (repurchase agreements, restricted, repayable) and current accounts, without moving the capital. Less rigidity, however, on pension funds and insurance. In this scenario, how to manage savings and how to invest wisely?
Participated in the investigation:
Alberto Crugnola (AC), Head of Private Clients Ticino Bank Migros Region
Elena Guglielmin (EG), Senior Credit Analyst Chief Investment Office, UBS Global Wealth Management
Gabriele Corte (GC), General Manager of Banca del Ceresio SA
Roberto Mastromarchi (RM), CFA BPS (SUISSE), Front Division Manager, Member of the General Management
Pietro Scibona (PS), Deputy General Manager, Head of Finance, Banca del Sempione
Sébastien Pesenti (SP), Head of Private Banking in the Ticino Region of Credit Suisse
In your opinion, what is the most correct psychological approach to be taken by investors when a situation of serious international crisis generates strong volatility on the markets?
AC: «Crises and periods of greater volatility are elements that characterize the financial markets. It is particularly important for investors to have a long-term view and to react calmly and prudently in these intermediate stages. Particularly in periods of relatively large price declines, many investors and investors tend to make emotional decisions. This often results in an excess of activism: when prices fall, investors and female investors sell most of their positions, and then buy back new ones in the subsequent recovery. This behavior negatively affects the long-term development of the portfolio's return.
We therefore advise investors to stick to their long-term investment strategy, even in crisis situations. A look back shows that every crisis is followed by a recovery. The portfolio's tactical stance should only be appropriate if there is a material change in the investment environment. The choice of the investment strategy is fundamental: in terms of risk it must correspond to the needs and knowledge of the investor. This increases the chances of keeping your nerve in times of crisis and sticking to your chosen strategy. It goes without saying that the objective of any investment strategy is to spread the risk as broadly as possible through adequate diversification ».
EG: "The impact of the war between Russia and Ukraine, the sharp increase in inflation in recent months, as well as the outbreaks of Covid in China have contributed to increasing volatility, raising fears that high inflation could lead to a slowdown of economic growth. Historically, geopolitical shock events have usually only led to short-lived setbacks in financial markets. In this context, it is important to diversify investments geographically, by asset class and by theme. A diversified portfolio, which actively adapts to prevailing market conditions and aligns with new trends, can be invested via an asset management solution with different risk characteristics. As always, it is also advisable to gradually invest a planned investment amount in individual tranches.
We expect businesses and governments to focus more on security and stability, highlighting areas such as energy, food and data security. Thematic investment solutions that invest in cybersecurity, new 5G technologies, but also in food safety and more sustainable energy production and supply in general, are particularly in demand. In times of high volatility, healthcare companies, which have solid profit growth and defensive qualities, are proving their worth. "
GC: «In my opinion, the best approach to follow, regardless of the color of the swans we encounter, remains to observe the markets from a height sufficient to avoid the distractions of the latest news. This means having an overview that allows a clear investment picture, which can be corrected, but not necessarily distorted, by the arrival of news of particular importance. This approach allows, first of all, to avoid irrational reactions dictated more by panic than by thoughtful reasoning. Secondly, it allows positioning suitable for positively exploiting economic trends, while accepting the volatility of the markets in the short term. The difficulty therefore does not lie in dealing with the contingent situation of the markets, but in giving a broader interpretation of the latter, positioning the portfolio on clearer and more rational visions than those of a very short term ».
RM: «First of all, don't panic! It is necessary to focus on the time horizon of one's investments: if there is no need to liquidate the positions, it is very imprudent to do so when an exogenous event that causes volatility occurs. Planning an investment and / or divestment is part of the correct implementation of a well-structured advisory process. It is true that emotions are also part of investing and therefore it is necessary to understand whether the stress generated by volatility is greater than the benefit deriving from a potential medium-term extra return. A correct risk profiling, carried out at the beginning of the relationship and periodically, should however mitigate these aspects of an emotional nature: in fact, in the last two years there have been some abnormal moments from the point of view of returns. They were real "stress tests" for the risk profiles of customers. We also remember that many customers have maintained an important liquidity in recent years: excessive downward movements can represent opportunities for accumulation on quality equities ».
PS: «In a complicated period like the current one, emotionality, which is the worst enemy of the investment process, makes itself felt in an even more“ cumbersome ”way. Defining the investment objectives, with particular attention to the time horizon, is what allows us to be able to look at the performance of the financial markets with sufficient detachment, even in difficult phases such as the current one ".
SB: «In this climate of geopolitical uncertainty and financial volatility, it is desirable to adopt a long-term rational and strategic approach, with good diversification and an orientation towards the new world context. Diversification across asset classes, but also across regions, sectors and themes, has never been more important than it is today. Furthermore, the emergence of new dynamics requires thematic adjustments: energy, cyber security and defense are key issues for investors, which we also find in our supertrends along with technology and infrastructure ».
Specifically, what investment strategy does your institution intend to adopt in the short to medium term?
AC: «Migros Bank offers its clients five different long-term investment strategies, which differ in terms of risk levels, ranging from very low risk strategies (Income) to high risk strategies (Dynamic). We support our clients in choosing the most appropriate investment strategy. Following this strategy, the client or client ultimately chooses the implementation that best suits their needs by entering into an asset management mandate, a fund solution or an investment advisory mandate. All the strategies offered are actively managed by the Investment Office of the Migros Bank. The Investment Office reacts to fundamental changes in the investment environment with appropriate tactical deviations from the long-term investment strategy. At the beginning of the year, we reduced the equity share to neutral (46,5% for the Balanced strategy) in all investment strategies and oriented it towards value stocks to react to the expected tightening of monetary policy . Due to rising interest rates, we are maintaining our underweight stance in bonds for now. Substantial positions in gold (5,5%) and real estate (12,5%) act as important diversification elements and provide some protection against inflation. We constantly monitor the conflict in Ukraine; in particular, it is important to identify any implications for the monetary policy framework and economic growth early in order to be able to react accordingly.
EG: «As part of our tactical allocation, and therefore with a 6-12 month horizon, we recommend investors to maintain a broad portfolio diversification. Our reference scenario focuses on moderating growth and inflation in the second half of the year. In the equity sector, the economic and market environment should favor investments in the “value” sectors, including energy stocks, and industrials. We also favor equities from countries with strong exposure to commodities within the index, including Great Britain and Australia.
In fixed income, areas of value have emerged following the rise in bond yields in recent weeks. We see opportunities in “green” bonds and therefore linked to environmental issues. In the context of diversification, we believe that alternative instruments, such as hedge funds and private markets, are very valid as they benefit from a performance that is uncorrelated with traditional assets such as the equity and bond sector.
Using portfolio hedges can reduce volatility and risk. Historically, the commodity complex has performed well in phases of high inflation and in our opinion it represents an effective hedge against geopolitical risks, given that further supply problems are possible. We believe the US dollar is also an effective hedge for the short-term portfolio. Greater exposure to defensive and resilient equities such as healthcare can help reduce overall portfolio volatility.
GC: «Starting from the previous answer, it is necessary to evaluate the most probable facts. First of all we have reached a situation of global economic interdependence never experienced in previous times; in addition, the spread of news, the speed of negotiation, the availability of technology and, partially, the uniformity of sector regulations, make the financial markets equally interconnected. This means market volatility that tends to increase as interdependence leads to greater correlation and therefore to being exposed to "new information" from various points of the globe. The impact on the markets of the repeated closures of Chinese ports, due to local regulations on the prevention of Covid, may be one of many recent examples. If markets become more volatile, the portfolio must be able to handle these shocks, potentially exploiting them in a positive way. Secondly, recent events have accelerated an already existing trend in the economy, namely the resumption of inflation. The prolonged period of reduction in production costs had reached its limits for several reasons: the cost of Asian labor was already beginning to increase and technology was tending to affect more than the cost of the single worker. In addition, the number of global consumers was continuously increasing and therefore their demand for goods. The second fact is therefore an increasing level of prices and consequently the need to maintain the real value of one's assets. Finally, for the sake of simplicity, if the above is true, we will experience a trend reversal in the trend of interest rates which, after decades of reduction and a prolonged phase even in negative territory, will slowly begin to rise. The third observation is therefore the return of the interest rate risk with a negative impact on everything that offers the market a fixed interest. We could continue, but already in this way we have some clear starting points for the construction of a portfolio, potentially resilient even in more troubled waters ».
RM: «We are undoubtedly in a decidedly uncertain phase: the consequences of the pandemic and the onset of the conflict in Ukraine have significantly changed the macroeconomic scenario. Strongly rising inflation, growing medium / long-term interest rates and central banks willing to raise short-term rates. A major paradigm shift in the way of investing, considering that the most likely scenario is that of a stagflation. Protecting the real value of client assets becomes imperative and is very complex, considering that fixed income offers negative returns net of inflation (and with increasing rates the performances offered by this asset class have been heavily negative).
Our advice is to underweight fixed income in favor of liquidity - in order to keep the overall volatility of the portfolio under control - and to remain invested in equities, in a well diversified way, in order to allow the portfolio to grow in a real way in the medium. term. In the strategic allocation of portfolios, we also favor the presence of global convertible bonds: in this sense, the Bank has prepared a dedicated product in the range of our Popso (Suisse) Investment Fund SICAV.
Complementing this basic approach, so-called alternative investments, with moderate portfolio allocation, can be useful in countering a scenario characterized by higher underlying inflation. Among these, real estate funds - Swiss or international - represent a good solution. A mention is also necessary for commodities, which have grown incredibly and which have very speculative characteristics and high volatility: for this reason we believe that they are not adequate as a basic element in an Asset Allocation. Gold is an exception, for which we believe the structural inclusion of portfolios with different weights depending on the chosen risk profile is useful.
PS: «In the short to medium term, in general, we adopt a prudent approach which in practice means reducing the maximum investment limits allowed by each profile by a percentage ranging from 25% to 50%. Thus, for example, a portfolio that had an equity exposure of 40% as its maximum limit is now invested in equities between 20% and 30%. Nor do we neglect the investment of part of the liquidity in short-term US government bonds. We believe the positive nominal rate and currency diversification can offer an advantage in the current environment ”.
SB: «In this context, our desire continues to be to remain close to our customers by offering them an ever-wider range of effective strategies and solutions to achieve their goals. In the short to medium term, we maintain a clear and diversified investment strategy. We advise our customers to rely on our customer advisors and specialists to find the solution that best suits their individual needs. "
What advice do you feel you can give to small investors who want to protect their assets right now?
AC: «Even in the current volatility environment, investors should follow the chosen strategy. Particular attention should be paid to diversification. The allocation should be articulated as much as possible across all asset classes and regions. In particular, the classic diversifying elements such as gold or real estate help to stabilize the portfolio in periods of volatility ».
EG: «We recommend planning your investment trying to maintain maximum diversification. It is important to focus on products that hedge against volatility and offer stable returns. Equities in the energy sector, stocks with high quality yields, “green” bonds are examples of this ».
GC: «Following the logic set out, regardless of the size of the assets in question, I would prefer a portfolio with little exposure to the bond world to avoid interest rate risk and the loss of real value. I would give weight to the equity component that is very actively managed, so as to be able to face the volatility of the markets and participate in real economic growth, thus avoiding passive positions. Finally, exposure to investments with a high “inflationary” content such as commodities and inflation-linked bonds would be required. As a counterweight to all this, I would have liquidity, in such a proportion as to reach a level of risk suited to my investment profile ".
RM: «Small investors - but also large ones - should be aware that the value of assets and returns are now potentially threatened by higher inflation, a phenomenon that has been closely monitored in recent decades. This means that taking refuge in liquidity to protect your assets is insufficient and that the world of fixed income will probably not help too much: you need to invest in more volatile assets, which offer potentially positive real returns.
From this point of view, BPS (SUISSE) has long favored the gradual approach to dampen the effects of volatility when entering the market: in our range of products and services, the so-called Fund Accumulation Plans, in the Classic and Plus versions , are suitable for every type of customer. In fact, it is the structuring and composition of the portfolio that makes the difference. Our flexibility is measured above all with individual consultancy: each client has different needs, it is up to us to understand and satisfy them as best we can. In this sense, also for asset management mandates, we are able to plan gradual entries and disinvestments ».
PS: «We need to understand if we are talking about nominal investment protection or real protection. In the first case, you can simply subscribe to a very short-term bond issued by a sovereign state with a high credit standing. Clearly, given the negative nominal rates, there is no total portfolio protection: the negative rate is the cost of peace of mind in the short term. Of course, nominal investment protection is never efficient when the portfolio is intended to remain available to the investor over time. Even more so in times like the present one, this approach depletes real value over time. Maintaining real value is a slightly more complicated activity for the investor to digest but unfortunately there are no shortcuts: it is a question of defining a time horizon that cannot be too short, accepting a level of volatility and building a tied portfolio in largely to activities that maintain their real value over time, primarily actions ".
SB: «Our customers' needs are individual and require specific solutions. Let us remember that even those who do not invest could run the risk of a decrease in purchasing power following a possible increase in inflation. We therefore recommend above all not to improvise, taking advantage of the know-how of our customer advisors. With the support of specialists, we help the client to clearly define the structure of his assets, taking into account his life cycle and the personal goals he wants to achieve. This translates into financial planning, which serves as the basis for correctly defining the risk profile, the amount of liquidity that can be invested and the time horizon ".
In particular, what is your policy regarding investment funds and which products do you intend to promote?
AC: «Migros Bank adopts a best-in-class approach in the area of investment funds. We want to recommend the best investment funds to our clients, regardless of whether they are Migros Bank Fonds or funds from other providers. This is the approach we apply systematically to all our mandates. "
EG: «The use of investment funds within the portfolio allocation follows the criteria of strategic and tactical allocation and therefore mixed funds focused on the equity and bond sector and alternative investments».
GC: «As a corporate philosophy, we do not promote investment funds, but we co-invest together with our clients, channeling resources towards managers deserving to receive our capital. We are therefore heavy users of investment funds managed by independent talents around the globe. In addition to talent, they must offer us transparency and risk sharing, or be co-investors alongside us and our clients in the fund they manage. Seen from this point of view, the investment fund becomes a very efficient tool for gaining access to champions that are difficult to reach ».
RM: «As mentioned, BPS (SUISSE) has been promoting accumulation strategies for some time: the sub-funds of our Popso (Suisse) Investment Fund SICAV can in fact be subscribed directly or through savings plans. In light of the macroeconomic scenario that we foresee and of the current market valuations, the strategies we prefer are those of Asset Allocation: in our range we have strategies dedicated to domestic investments with the Swiss Conservative sector and to global investments with the Global Conservative and Global Balanced sectors. .
BPS (SUISSE) has an open architecture that allows a wide choice of funds from the main national and international investment houses, as well as the proposal of multi-manager management mandates, also of an ESG type. In the equity sector, we believe the strategies based on high dividend stocks are interesting at this stage: to mention the Sustainable Dividend Europe fund which invests with ESG rules in European companies characterized by solid fundamentals and able to distribute dividends above the market average ".
PS: «We have our offer of products through Base Investments Sicav which has proven to be, especially for some sectors, an excellent investment tool in the past years. Given the framework of very low nominal rates, we are making the product range evolve by launching more equity-oriented sub-funds ».
SP: «Within Credit Suisse we adopt an open architecture policy: there is an investment fund selection process aimed at identifying instruments that offer the necessary transparency. In this way we reduce the risks for our clients, who can choose from a wide range of solutions, with investment funds from Credit Suisse and other providers. Within our Credit Suisse Invest advisory mandates, we offer various long-term investment strategies with an attractive price-performance ratio. In the current environment of uncertainty, we are even more recommending our discretionary solutions, including investment funds and customized wealth management mandates. In particular, we also offer impact investing solutions, ie investments made with the intention of generating a positive and measurable social and environmental impact, together with a financial return ".
