Rothschild Wealth Management just published their Rothschild Market Newsletter for March, a copy of which was reviewed by ValueWalk. Chief Investment Officer Dirk Weidman makes the case that 2014 will be a year of continued recovery in the financial markets, but he does highlight a number of risks that could upset the economic apple cart over the next few quarters.

Equities are the place to be, thinks Rothschild

The March Rothschild Newsletter argues that relatively clear economic skies ahead means equities are the place to be. “Although valuations are starting to look stretched following an extended period of strong returns, we continue to favour equities as the most attractive asset class…” They argue that the Fed taper is is intentionally moving at a snail’s pace and continued abundant liquidity and low interest rates means Improved earnings prospects for at least the next couple of quarters.

Rothschild Equity market performance

Macroeconomic risks suggest hedging is prudent

Despite their bullish call on equities, the Rothschild analysts suggest that their wealthy clients continue to hedge their portfolios given the not insignificant possibility of a major economic disruption sometime over the next couple of years. They explain their point of view below:

“Although equities remain the most attractive asset class, they are vulnerable to stretched valuations, while monetary policy is limited by high debt levels and interest rates that are already close to zero. Therefore, we include hedging strategies that can limit the potential losses from our portfolios if the equity markets suffer a material correction.

  • We have a sizable allocation to hedge funds that can provide significant protection in a bear market or which are not affected by adverse movements in equity markets and therefore provide true diversification.
  • Additionally, we have direct equity hedges usually in theform of out-of-the-money put options on broad equity.”

Rothschild market outlook

Real assets important hedge against inflation

The Rothschild newsletter also suggests that investors continue to add real assets to their portfolios as a hedge against the possibility of the ongoing economic recovery rapidly leading to inflation.

“The still sizeable probability of our “new monetary world” scenario lies behind our ongoing exposure to real assets such as gold, real estate and possibly inflation-linked bonds.

  • We are also confident that over an economic cycle equities continue to offer protection against inflation.
  • Additionally, we are focusing on hedge funds that have the flexibility to adjust to an unexpected rise in inflation.”