Summer holidays portfolio planning: four key changes

INDUSTRY VOICE: Around now, our thoughts tend to turn to the holidays and long, relaxing days by the beach. But before reaching for the suncream you have to check the forecasts and ensure your portfolio also has the requisite protection.

Lyxor ETF’s head of Equity, Chanchal Samadder, suggests four changes to make on your portfolio for a successful and stress-free summer.

  1. Be prepared for bad weather

We advise caution currently given trade wars, geopolitical tensions, rising populism and the omnipresent uncertainly over the timing and/or extent of the withdrawal from ‘super loose’ monetary policies. We expect some stormy conditions – especially among equities – as the cost of debt spirals and the global economy peaks. Decent returns will be harder to find, especially in more mainstream destinations, so for peace of mind we’re focusing on diversifying by getting off the beaten track and using risk reducers and other protection strategies.

Lyxor’s Minimum Variance ETFs tackle risk not only aim to reduce volatility but pay attention to portfolio diversification, to spread your risk much wider. Five ETFs cover Europe, the US, emerging and global markets with TER starting at 0.20%

2. Choose your destination wisely

There are some bright spots however, so we’re not entirely risk-averse. Europe’s busy political agenda could delay policy tightening, and the current soft patch is temporary in our eyes. Any rebound should trigger a catch-up of earnings growth and support stocks. For now though, political issues ensure we’re not as positive as we once were but France looks attractive on the back of strong structural reforms. We continue to favour cyclical sectors such as consumer discretionary as well as construction and materials. They are well positioned to benefit from the domestic recovery and have been deleveraging and improving their solvency in the last couple of years. We’re steering clear of most conventional European bonds.

In the US, the headwinds are such that they should keep the Fed tied to its current path. We expect Treasuries to remain de-coupled from political tensions in Europe and to gradually drift higher from here. We expect lower returns from equities, especially as there’s little room for additional economic impetus beyond the tax cuts and the mid-term elections threaten some turbulence. Corporate buying should at least provide some support. Credit (whether high or low quality) is off our radar as the cost of debt is rising at a time when leverage is at all-time highs and recession may be drawing closer.

We remain positive on commodities, but prefer base metals. Both oil and base metals should continue to be supported by strong fundamentals as recovering demand meets with struggling supply. Oil comes with a little more downside risk however. We’re also interested in those commodity-linked assets, like the FTSE 100, which lagged the initial commodity price recovery.

Inflation as an asset class remains of interest, and breakevens may represent the path of least resistance over the coming months. They also offer diversification benefits which could prove beneficial as we head for the exit from a low inflation, low volatility world.  

Lyxor’s inflation protection ETF range is Europe’s most complete – with 7 ETFs covering Europe, US and UK bonds. Their US TIPS ETF and index linked gilt ETF is the cheapest on the market with TERs at 0.09% and 0.07% respectively.

3. Consider something more exotic

With developed markets overcrowded and overvalued, it could be time to spread your wings to some more exotic destinations. We like China, but it could be time to include a few more emerging markets in your plans. A number of other countries offer external surpluses, low inflation and reasonable growth and could now be better value after the recent sell-off. This should provide protection when the greenback’s run of strength eventually gives way. It could be time to renew your focus on Asia’s domestic stories given external risks might rising. Onshore Chinese equities benefit from reasonable growth, increased accessibility and low correlation with developed equities. ASEAN markets also appeal as could, in time, India.

Lyxor offers 23 different ways to explore the emerging markets. From broad indices to single countries, many are the Europe’s oldest, largest or lowest cost. Find out more and view the full range.

4. Travel only in good company

The US economy has been more resilient than its counterparts in Japan and the eurozone. However, its economic surprise indicator has already passed its peak. Corporate bonds should come under pressure as corporate debt piles up – further encouraged by fiscal reform – and the Fed tightens. If you do have to hold credit, we’d suggest making any journey brief. When debt fears rise and balance sheets come under the microscope, equity volatility also tends to increase, providing an incentive to reduce or reshape your equity exposures. A greater weighting to quality income or value stocks could be a solution at this late stage of the cycle.

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Risk Warning


All views & opinion: Lyxor Equity ETF & Lyxor Cross Asset Research teams, as at 13 June 2018. Charts sourced from SG Cross Asset Research team (“Expect less for longer”). Past performance is no guide to future returns. *All TERs correct as at 13 June 2018.

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This research contains the views, opinions and recommendations of Lyxor International Asset Management (“LIAM”) Cross Asset and ETF research analysts and/or strategists. To the extent that this research contains trade ideas based on macro views of economic market conditions or relative value, it may differ from the fundamental Cross Asset and ETF Research opinions and recommendations contained in Cross Asset and ETF Research sector or company research reports and from the views and opinions of other departments of LIAM and its affiliates. Lyxor Cross Asset and ETF research analysts and/or strategists routinely consult with LIAM sales and portfolio management personnel regarding market information including, but not limited to, pricing, spread levels and trading activity of ETFs tracking equity, fixed income and commodity indices. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and reports. Lyxor has mandatory research policies and procedures that are reasonably designed to (i) ensure that purported facts in research reports are based on reliable information and (ii) to prevent improper selective or tiered dissemination of research reports. In addition, research analysts receive compensation based, in part, on the quality and accuracy of their analysis, client feedback, competitive factors and LIAM’s total revenues including revenues from management fees and investment advisory fees and distribution fees.


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