Citywire printed articles sponsored by:
View the article online at http://citywire.co.uk/wealth-manager/article/a709419
How are wealth managers stress-testing for a US default?
by Elsa Buchanan on Oct 16, 2013 at 07:42
On the basis that the US defaulted, Reynolds has also stress-tested portfolios on interest rates going up, while commenting the rise in the US risk-free rate would undoubtedly impact equities’ long-term valuation.
In the assumption the US could default, Courtiers has reduced its equity exposure and moved short duration in its fixed income allocation.
‘We have been long the dollar, which was quite defensive, and we are being cautious on equities,’ Reynolds said, adding he is typically 59% exposed to the dollar, and is slightly overweight against the MSCI World with a 53.5% allocation to the S&P.
Alternatively, for Niamh Wylie, a portfolio manager at Coutts, stress-testing a portfolio for an impending US default is ‘not very useful’.
‘Instead, we look at asset class responses during a range of financial crises,’ she said.
‘Historically, extremely negatively correlated assets would do well, and in this particular scenario, perhaps German or UK government bonds, in addition to some commodity trading adviser (CTA) funds, cash and gold.’
Wylie anticipates an ‘illogical’ reaction from the markets: ‘While reason would dictate a sell-off in Treasuries on the back of a US default, we could have a scenario similar to when the US was downgraded, where long-dated Treasuries actually rallied.’
Barclays’ Gardiner also believes risk assets could see high levels of volatility, with Treasuries actually outperforming. While he is advising clients not to trade on a potential default, he explains investors wanting to reflect it in their portfolios should ‘own more bonds’.
The US Treasury department said in a report that a default had the potential to be ‘catastrophic’.
After running out of borrowing authority on 17 October it will have around $30 billion in cash to pay maturing debt, but few are expecting an actual default.
News sponsored by: