‘We see a clear role for alternatives’: Pros give their tips on how to trade the volatile market

Top pros have given CNBC their tips for alternative investments as stock markets continue to be volatile and indexes are seeing losing streaks week after week . “Stocks are headed for a new regime of higher volatility and lower returns,” according to Tapan Datta, head of asset allocation at Aon , in an email to CNBC. “This is regardless of how the current market cycle ends — whether into a full recessionary bear market slump that could be in the 30-50% range, or whether markets find their footing soon after the near 20% fall already seen,” Datta added. Gold is a pick for Aon, “mainly because of its role as a market hedge given its long-established tendency to outperform in a weak stock market environment,” he said. Gold is traditionally viewed by investors as a way to hedge inflation, which the nonpartisan Congressional Budget Office expects to stay well above the Federal Reserve’s 2% target this year and next, it said Wednesday. Rising commodity prices are a key sign of inflation, and they have gone up due to factors such as Russia’s invasion of Ukraine . But while Datta says commodities in general are “risky,” other experts are in favor of them. Jean-Paul Jaegers, head of asset allocation at Barclays Wealth Management and Investments, called commodities “sufficiently unique.” “Conditional on the exact risk tolerance, in our multi asset portfolios we hold between 8 to 13% in Commodities (13% for a medium risk portfolio),” he told CNBC by email. Read more Buy these software stocks as cyberattacks climb, Stephens says Drug and biotech sales hold up during recessions, Morgan Stanley says. Here are the firm’s top picks Morgan Stanley reveals the two chip stocks it says will dominate over the next decade Meanwhile, Joost van Leenders, a senior investment strategist at Kempen Capital Management, said: “We have an overweight in commodities in our model portfolio and recommend other alternatives like infrastructure, land and some floating-rate debt instruments as add-ons.” Floating-rate notes are bonds that have interest rates that can be benchmarked to the U.S. Treasury note . Van Leenders also highlighted infrastructure as an inflation hedge. Inflation-linked bonds “The importance of these alternative assets is rising as we move into a different market environment today, so this is a good time to evaluate their role and whether the alternative asset portfolio is appropriate to the tasks at hand,” Datta said. Traditional portfolios are often balanced 60% stocks and 40% bonds but this ratio “is in some difficulty,” he added. Inflation-linked bonds could help, he suggested. “In the UK, the inflation-linked market looks very expensive, but globally, the US TIPS market, the French OAT market and a few other inflation-linked bond opportunities could be used to build more direct inflation hedging portfolios,” Datta said. TIPS refers to treasury inflation-protected securities issued by the U.S. government, while France’s OATs are government bonds available to retail investors. Jaegers is also a fan of inflation-linked bonds. “We see a clear role for Alternatives which – for our clientele and liquidity requirement – is predominantly Commodities and Absolute Return,” he said. “In 2020, we deliberately reviewed inflation sensitivities in portfolios and the risks surrounding a potential rise in interest rates. We therefore included inflation linked bonds at the expense of traditional bonds,” he explained. Jaegers also had a word of warning for people reviewing their portfolios, saying to avoid focusing on the individual performance of a security or item. “When solely looking at realised returns, by definition, there will be winners and ‘below-average’ in portfolios,” he said. Diversification is important, Jaegers added: “In most cases, a carefully selected portfolio of approximately 8 to 10 assets will capture nearly all diversification – after which it will become a challenge to find additional unique exposures.” – CNBC’s Thomas Franck contributed to this report.

Gold bars being counted in Istanbul
Yoray Liberman | Getty Images

Top pros have given CNBC their tips for alternative investments as stock markets continue to be volatile and indexes are seeing losing streaks week after week.

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