The wealth management branch of banking giant UBS has warned that many investors are unprepared for the higher levels of market volatility due to shake markets in 2018.
UBS has urged investors to keep putting their money to work, however, saying they need to "hold their nerve".
In a 24-page note to his client base, UBS Global Wealth Managements chief investment officer Mark Haefele – who oversees the investment strategy for $2.4 trillion in assets on behalf of high- and ultra-high-net worth clients – said that market volatility was likely to become more prevalent in 2018.
"In short, the period of exceptionally low volatility that investors enjoyed in 2017 is over. 2018 has seen a number of risks surface that could end the economic cycle, triggering a bear market in global equities, or at a minimum, leading to even higher market volatility," he said.
Returns will likely be lower – were assuming annualised equity market returns in the mid-to-high single digits. But we dont believe a pick-up in volatility signals the end of the bull market. This is not a time to jump to cash. The cost of being uninvested remains high.
Haefele advised investors that there were several ways they could prepare their portfolio for increased volatility.
These included diversifying beyond classic equity and bond indexes to niches such as hedge funds and "smart beta" strategies, which weight assets by factors other than their size such as volatility or dividend policy.
He added that investors should steer away from risky sub-investment grade creditor excess foreign-exchange risk, and look to countries and sectors "beyond the familiar".
"Our data suggests investors are currently relying too heavily on passive approaches in traditional markets, focusing too strongly on getting higher yields, concentrating in familiar assets such as those close to home or in a well-known industry, and not thinking sufficiently long-term”, Haefele said.
UBS believes fintech, automation and robotics, digital data, energy efficiency, sustainable investing and private equity offer the most promise for long-term investments.