Time to position portfolios for volatility, says Wells Fargo

Stopping short of a recession call, the firm is advising investors to be mindful given the age of the stock rally

Time to position portfolios for volatility, says Wells Fargo

Those who have not yet adjusted their portfolios following last year’s bouts of volatility would do well to consider starting now.

That’s according to the Wells Fargo Investment Institute, which recently released its 2019 Midyear Outlook. With the US economic expansion in its 11th year and many portfolios becoming too equity-biased as a result of the long-term rally in stocks, investors ought to review their portfolios in terms of alignment with their financial plans as well as prevailing and expected market conditions.

“Start making incremental moves now, based on what is cheap and what is expensive,” said Paul Christopher, the institute’s head of global market strategy, as reported by ThinkAdvisor. “Pay attention to what is no longer an attractive value in the portfolio. Look for something over its target price.”

Speaking with reporters, Christopher expanded on other strategies investors should consider:

  • Unless the portfolio already contains a sizeable amount of cash, look for opportunities to sell overvalued stocks during rallies and park the cash while waiting for better entry points in the following months;
  • Noting that REITs and high-yield bonds are “unattractive now,” while utilities are “very expensive,” he said that equities with increasing dividends are better options for income generation at the moment; and
  • With volatility in the cards for financial markets, investors should consider long/short equity strategies and relative value credit strategies as hedges. Accredited investors can also explore options in private capital, hedge funds, and private debt.

The institute’s printed midyear outlook also expected positive earnings growth in developed (ex-U.S.) international equities, albeit with risks; the MSCI EAFE Index’s heavy reliance on exports for earnings growth could leave it lagging U.S. and emerging-market earnings growth until trade tensions and Brexit uncertainties dissipate. There was also mild bullishness for emerging-market equities, including China stocks and sectors with higher-quality earnings, such as technology and industrials.

“Ambiguity on trade and its impact on global growth are headwinds from emerging markets, but … growth among consumer-oriented companies is strong, corporate profits are improving, and China’s government is injecting economic stimulus,” the outlook said. “We expect 2.4% earnings growth in the MSCI Emerging Markets Index and find the stocks attractively valued.”

On the fixed-income side, the institute’s strategists maintained an unfavourable stance on international developed-market debt, particularly as Europe’s struggles with significant volumes of negative-yielding sovereign debt and exceptionally low rates continue. As for emerging-market debt, they held a neutral stance as expensive-looking valuations dampen the likelihood of the asset class’ rally continuing into the second half of 2019.


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