The global economy appears to be warming up, with
better-than-expected China
data offering some cheer, while volatile financial markets have jolted some
complacent investors and knocked prices to more realistic valuations, Rothschild
Wealth Management said in a monthly note.

Conditions remain uncertain, the firm said, citing risks
such as Germany’s federal
elections due on 22 September, the tapering, or ending, of the US Federal
Reserve’s hefty monetary stimulus and the violence in Syria. Rothschild added that the
issue of China’s
credit bubble is “perhaps the greatest threat to global growth and we believe
it could burst at some point. We will continue to protect portfolios during
this uncertain period”, the firm, in a note by Dirk Wiedmann, head of
investments, said.

Although Rothschild Wealth Management said its broad
investment stance remained steady over the past month, it highlighted three
important areas:

-- There is an investment case for holding large technology
companies. Additionally, activist investors have a number of targets in this
sector, which could add further value;

-- Rothschild Wealth Management said its move last month to
protect portfolios using equity put options with a preference to hedge the US market “has
worked well against the recent correction”;

-- It says that despite a lack of any clear developments in Japan, RWM is “inclined
to give Abenomics the benefit of the doubt and believe the country’s economic
recovery is likely to continue”. (The reference is to Shinzo Abe’s aim to
reflate and boost the Japanese economy.)

The wealth management firm said equities and real estate offer
some protection against inflation at a time when central bank policy is in “uncharted
territory”.

It argues that shares in leading global businesses are “fairly
valued” and pay strong dividends, so are an attractive area.

As government bonds often cannot be relied upon to defend
capital in tough markets, given ultra-low yields and associated risks,
Rothschild Wealth Management is using specialist hedge funds and option
strategies to mitigate risks.

On Japan,
the firm said valuations for Japanese equities are “generally neutral” but the
market looks cheap on some yardsticks, such as the price-to-book ratio measure.

“In our view, a weaker yen and negative real interest rates
could trigger a further re-rating of Japanese equities over the next 12 to 18
months,” it said.

By constrast, Rothschild Wealth Management said it is
avoiding cash – due to negative returns – and high-quality government bonds,
where yields are insufficient compensation for risks.