“Historically this funding has been done mainly through prime real estate in London but going forward that is not going to last forever. On monetary policy side, the devaluation of sterling over the past six months or so has caused some inflation for the consumer and so it is difficult to have a more accommodative monetary policy as inflation will cause a more dangerous spiral.
“The best thing they can do is engineer a slow and gradual depreciation of sterling, so medium-to-long-term we are not positive on the pound.”
The house view is also negative on other major developed market currencies, which Monier believes are at a “tipping point”.
“We are starting to wonder if we will see a new trend developing with appreciation of the euro versus the dollar, because there is a time gap between the US and European economic cycle, usually around three to four years,” he says.
“Now that political risk is behind us we think the ECB is going to concentrate on the fundamentals again. Because the political risk is lower, they are probably going to look at assessing the economic conditions in a more objective way – and in our opinion the economic conditions do not justify the extraordinary measures in place.
“They have already reduced the asset purchasing programme from €80tn to €60tn, and we think they are going to continue to reduce it. They might bring the interest rate back to 0% by the end of the year, and will probably put rates into positive territory towards end of 2018 or early 2019. Financial markets are always anticipating those things so it’s going to be a tailwind to the euro versus the dollar.”
Within fixed income, the preference is for emerging fixed income and emerging currencies. The team was also well positioned in high yield, but this is something it is starting to question because valuations are becoming expensive. There is an underweight to government bonds, especially US treasuries and bunds which are expensive.
An area that Lombard Odier has big faith in going forward is real assets, believing that while central banks have spent the past seven years being accommodative in pouring money into the financial system, financial assets are more liquid than real assets and so on a relative basis they are more overinflated.
“Today we would advise our clients to have a higher proportion of real assets than normal because they are less overvalued, such as property, private equity, infrastructure, farmland etc,” Monier says, with his team offering appropriate best-of-breed funds in this category.
