Rothschild Wealth Management is concerned about complacency and somewhat befuddled about the potential for stimulus in the Eurozone given the economic indicators.

Rothschild: Significant risks in the Ukraine and Syria

In their September “Market Perspective” report, Rothschild observed that while the risks in the Ukraine and Syria are significant, they also expressed confidence “conflicts will be avoided.”

US equity markets are in a mid cycle phase, the report noted, as corporate profits “and eventually interest rates” are “more likely to rise than fall.”  This said, the component to consider is how much of this is already priced into the market?  The report noted that stocks are not cheap but look more of a value than they did at mid-year. Bonds, one key focus of central bank stimulus programs, have long been expensive but have only become expensive over the past month or two.

The wealth manager, long considered by conspiracy theorists to rule the financial world through a secret society, predicted “the still sizable probability of a ‘new monetary world’ scenario” is the logic behind its recommended exposure to real assets including gold, real estate and inflation-linked bonds.

Rothschild
Rothschild

In other words, they appear to be preparing in part for a QE bubble to burst, which could bring in an economic market environment where things that are real and have tangible value – as opposed to currencies and government bonds, which rely on a promise from government to hold their value — are one method to weather an economic storm.

Rothschild recommends hedging strategies

In their public comments Rothschild said they believe the “depression scenario” is the least likely probability of various modeling.  However, such an event would be “so disruptive it must be considered.” As a result the investment manager recommends hedging strategies to limit potential losses due to “a material correction.” They recommend certain hedge funds who can protect to the downside during a bear market.  The investment advisor is further outlining a strategy with out-of-the-money put options on broad equity indices, but the report did not reveal the monthly premium cost of engaging in such a strategy.

Proper risk management and a dose of prudence in place, Rothschild continues to favor equities.  The report noted improved earnings prospects in a “economic renaissance” scenario that could boost equity prices despite potential higher interest rates. “This pattern applies particularly to the US market. It is the most overvalued region but equity prices could continue to rise if the ‘economic renaissance’ scenario becomes increasingly likely,” the report noted.

In fixed income the investment manager is predictably avoiding long-maturity bonds “that would be most negatively affected by a return to more normal monetary policy in the ‘economic renaissance’ scenario,” the report projected. In other words, if the economy picks up interest rates could rise and long term bond prices could drop.