Deutsche Bank urges investors to seek alternatives to shares, bonds

PUBLISHED : Monday, 29 June, 2009, 12:00am
UPDATED : Monday, 29 June, 2009, 12:00am

The pillars on which investment portfolios have traditionally rested, such as equities and bonds, should be replaced by new asset classes following the devastating implosion of markets last year, the lead strategist for Asia-Pacific at Deutsche Bank Private Wealth Management says.

'This crisis really has the impact that people will go for alternative investments,' said Christian Nolting.

'People will start focusing on this and of course it's due to correlation, due to diversification.'

Mr Nolting expects alternative investments, such as currencies, property or pure commodity plays, to comprise more than half of a portfolio within three years, compared with a current share of about 10 per cent.

Capital markets were pulverised last year by the combination of a United States housing crisis and the collapse of the global financial system. Analysts believe the massive losses that investors incurred have challenged the traditional investment wisdom of accumulating equities for the long haul.

The benchmark Hang Seng Index dived 48.27 per cent last year to its lowest level since 2004. Mainland markets were even worse off, as the Shanghai Composite Index plummeted 65.39 per cent.

While equity markets regained some ground this year, they have since hit a wall as investors refuse to chase after valuations that are no longer considered attractive.

Market watchers said liquidity flows had been partially diverted away from stocks and into the property and commodity markets.

'Equities might be interesting. But the importance of equities, after the experience we've had over the past 10 to 12 years, might just go down,' Mr Nolting said, adding he had taken profit on some of his equity positions and redeployed some funds into alternative investments such as commodities.

'There's much more liquidity in the alternative investment space right now. So this thing will develop very fast and might be very important for investments.'

Commodities have begun to siphon off investments from other asset classes as new trading technology and a proliferation of commodity-related funds make access to the market easier than ever.

'Now, as an equities trader I can hedge futures contracts on gold, aluminium and a lot of specific products, and this is why commodities have gone from a specialist to a mainstream type of audience,' said Martin Marnick, the head of trading at Helmsman Global Trading. 'You've gone from a two-step shuffle to a three-step for a new holy trinity of bonds, equities and commodities.'

Investors have begun selling down equity stakes and diverting funds into other markets. High-net-worth individuals cut equity positions to 25 per cent of their combined portfolios last year from 33 per cent in 2007, according to the World Wealth Report released by Merrill Lynch Global Wealth Management and Capgemini.

But the Asian sell-down should be viewed in the context of the historic market collapse, said Stephen Corry, a strategist for Asia-Pacific at Merrill Lynch Global Wealth Management.

'[For] Asia and the other markets, there is still a lot of equity,' Mr Corry said. 'And equity will continue to dominate as long as there is greater economic stability and confidence in equity markets.'

Equities are so popular among investors partly because they are relatively simple securities to trade and track. Alternative investments must offer a similar level of transparency to become more mainstream, Mr Nolting said.

Growth of alternatives will also hinge on an improvement in the global economy because if a prolonged recession sets in, this is likely to deplete asset classes across the board with the exception of bonds.

Mr Nolting said the recent market rally did not suggest the tough times were near an end.

'It's like a V-shaped recovery for the worst recession in 60 years and that would be too nice to be true in the end. In this market environment, you need to be very dynamic because many important things can happen.'