“Our view is that, on balance, overweight equity exposure, combined with relative value trades, and portfolio hedges, is the right positioning for the start of 2019,” Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote in an outlook for next year.
Unigestion SA also reckons that 2019 is the year of entrenched divergence. “We expect the opportunity set to change next year, from being directional to more cross markets/relative value oriented,” the $25 billion investment manager wrote in a recent note.
Euro Woes
Smart-money traders are sniffing opportunities as vanilla correlations crater.
In Europe, the weakness of the single currency is failing to give equities dominated by export-orientated multinationals a lucky break as investors flee a region riddled with political risk and easing profit expansion.
“Generally, if the euro would rally, these companies would suffer -- but in the environment we’re in, that is trumped by idiosyncratic drivers,” said Pande.
He favors bullish call options on European shares conditional on a small strengthening in the euro. The strategy is looking decidedly cheap right now as the contract’s price is capped by the historic relationship these two assets have enjoyed.
Risky Business
While Credit Suisse Group AG also extols the virtues of multi-asset options, the securities are complex and risk backfiring if market doesn’t move as divined.
Still, relative-value trades have an obvious appeal in a choppy landscape where local flare-ups throw correlations off balance, while continued economic expansion challenge bearish bets with conviction.