How Rothschild Private Bank is positioned for 2011

Wed Jan 5, 2011 1:23pm GMT

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Rothschild Private Bank has continued to increase its exposure to equities, but, with inflation lurking further out, is concerned that investors are becoming complacent about a recovery that is not yet guaranteed.

Inflation threat In its first asset allocation report of the year, Rothchild Private Banking & Trust's chief investment officer and head of investments Dirk Wiedmann also warned that, despite Japanese deflation, US core consumer prices rising at their slowest rate since the 1950s, and the need by some Eurozone countries to lower wage bills, inflation was a growing risk despite Japanese deflation, US core consumer prices rising at their slowest rate since the 1950s and the need by some Eurozone countries to lower wage bills.

Wiedmann cautioned: 'Commodity prices are rising strongly, monetary policy is exceptionally loose, major currencies are being debased and shortages of workers with specialist skills could push unit labour costs higher, even at a time of high unemployment.'

Wiedmann expects emerging market economies to continue to contribute to inflationary pressures as wage rates rise and currencies strengthen and noted that assets in cities such as Hong Kong and Geneva were already experiencing sharp hikes, citing classic cars, wine and art as good examples.

He said that inflation, a classic solution to a debt crisis, had historically contributed to the erosion of real wealth for private investors and against that backdrop, the company continuind to favour real assets such as commodities and equities over paper assets such as bonds and cash.

Below is a snapshot of how the private bank is currently positioned in key asset classes.

Bonds and Cash We have held a negative view of government bonds for well over a year and have very low allocations in portfolios. In our view, government bonds remain overvalued, even after the recent correction.We expect yields to drift higher in 2011, leaving bondholders with low or even negative total returns. Corporate bonds look better supported than those issued by governments but now have less room for further gains.

Equities The outlook for equities continues to improve.Valuations are undemanding, corporate profits should keep rising and equities remain attractive when compared with the alternatives elsewhere. We are adding further to our holdings in equities, moving up to a neutral position.

Hedge Funds More normal correlations between and within asset classes should be good for a wide range of hedge fund strategies in 2011. We continue to back talented hedge fund managers and recommend an overweight position.

Commodities and gold Commodities are real assets and should benefit from the inflationary policies of central banks.The fundamentals behind most paper currencies are very weak and this is one of many factors creating strong demand for gold. We believe the current environment is a good one for both gold and blended commodities and we recommend an overweight position in both asset classes.

Real Estate For long-term investors, property remains attractive as a tangible asset with fairly predictable cash flows. However, property in highly-indebted countries continues to struggle and, for the time being, we maintain an underweight position.

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