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Credit Suisse: It's time to hedge against growing risks

Stock markets may still be rallying, but now is the time to find "insurance" for their portfolios amid growing geopolitical risks, said Robert Parker, senior advisor on investment strategy at Credit Suisse, on Monday.

"Taking a two-to-three year view, the outlook for global equity markets is reasonably good," Parker said at a market outlook presentation for private banking clients. "Taking a two-to-three months view, I think we've got to be cognizant of the risks, whether it's European political risk, whether it's disappointment with Trump not delivering on his promises. We also shouldn't forget geopolitical risk in the Asian region," he said, noting that

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North Korea had conducted another missile launch that day.

Parker pointed to another reason investors should feel a little bit antsy about markets.

"We are seeing quite an interesting trend over the last two weeks, and this trend is particularly the case in the American equity market, which is that retail investors are continuing to put money into equities, institutional investors are pulling money out of equities," he said.

"Don't be surprised by a correction," he said.

Parker noted that one of the drivers of the U.S. market rally was counter intuitively a signal of risk aversion: Bond yields remained unattractive in real terms.

He expected that by June or July of this year, U.S. inflation would be around 2.5 percent, in line with the current yield on the 10-year U.S. Treasury bond.

"The real yield is close to zero. So the unattractiveness of bond markets is pushing money into equity markets," he said. "Why are bond yields still quite low? The reason is they are buying bonds as a little bit of insurance."

Credit Suisse recommended several hedges to insure against rising risks. Parker noted that buying the Vix, or fear index, was probably the most effective hedge.

Buying the yen was also recommended as Japanese investors tend to repatriate funds amid bouts of risk aversion.

Heng Koon How, Credit Suisse's senior investment strategist for Asia-Pacific foreign exchange, who also spoke at the client meeting, noted that Japan currently has a current account surplus and the country has already had capital inflows for every week so far this year. He expected the yen would strengthen ahead.

But Heng noted that one other usual risk hedge, gold, wasn't working out well currently.

"Everybody wants to own gold as a hedge against risk aversion that is perfectly correct but it's not working out at all because the U.S. dollar is rising. So as a good hedge against risk aversion, I would say own gold in euro terms," he said, noting rising political risks on the continent with multiple elections in coming months.

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