Investors should consider geopolitical hedges while costs are low

Although the cost is still relatively cheap, investors should consider protecting their portfolios against uncertainties from politics and other sources, the Swiss company says.

(The interview was conducted before the French national elections, discussed in this article.)

Investors may consider solutions to protect themselves against geopolitical risks and the impact they could have on their portfolios. Pictet Wealth Management believes that it is appropriate to consider such measures when risk management – for example via the options market – is relatively inexpensive.

The recent European Parliament elections, which saw right-wing populist parties gain ground, and the risk that France could follow suit in national elections, opposing fiscal discipline and free trade, have raised concerns about the impact this could have on stocks, bonds and the euro. The UK has swung to a Labour government with a large majority, albeit on the British first-past-the-post system. The US presidential election in November also looms large.

Using the language of the “VIX” – the US S&P 500 stock volatility index – César Pérez Ruiz, chief investment officer of Pictet Wealth Management, told this publication that “we live in a market where the VIX is at 15 but the outside world is at 50. It is very cheap to hedge.”

This disconnect between the seemingly tense world of politics and war contrasts – at least for now – with a calmer market environment. In that context, it is a good time to consider hedging, Ruiz said in an interview at his company’s headquarters in Geneva.

Investors might consider buying put options on French stocks if, as some polls suggest, the French National Assembly falls under the control of Marine Le Pen’s National Rally. (Editor’s note: At press time, the National Rally appears to have lost its takeover bid, although the French political situation remains in flux.)

A major problem, for example in the United States, is that politicians have presided over budget deficits even when unemployment was relatively low, as it is now, Ruiz said. “There is simply a loss of fiscal discipline,” he said.

Instead of relying on the US Federal Reserve, as it has for many years, to stimulate markets through looser monetary policy – the “Fed put” – the world is now adopting a semi-permanent fiscal policy, or “fiscal put”, he continued.

Against this backdrop, Ruiz said Pictet was “positive” on gold – a traditional portfolio insurance approach.

Argentina

Wealth Briefing He asked Ruiz what he thought of the “tough” policy of Argentine President Javier Milei, who has advocated drastic cuts in public spending – including the elimination of thousands of public sector jobs – in an attempt to repair the Latin American country’s poor credit rating. Milei’s support for free markets, classical liberal economics and politics is reminiscent of the Thatcher years and, as under Margaret Thatcher, such a policy is not easy to accept.

“I hope it (Milei’s reform program) works,” Ruiz said. “It cuts everything and it puts the country in a very difficult situation… there is no money. If the population is willing to take the hit longer… then there could be foreign direct investment,” Ruiz said. It is not yet certain that Milei can achieve this change, he added.

Moreover, China will face challenges if Donald Trump is re-elected to the White House in November because Trump wants to raise tariffs on countries like China and its so-called proxies, such as Vietnam, Ruiz said.

Asked about the bipartisan agreement on protective tariffs — the Biden administration favors tariffs on Chinese electric vehicles — Ruiz said the massive increase in Chinese electric vehicle production poses a serious threat to Western manufacturing capacity. Calls for tariffs and non-tariff barriers should be viewed in that light, he said.

Neutral on China
Dong Chen, head of Asia strategy at Pictet Wealth Management, said the firm was neutral on China, although “our stance is slightly more positive than a few months ago.” Pictet has been cautious on China for some time, he added.

There is one notable problem: Even though China’s economic growth remains quite strong, its stock market performance has been disappointing, he added. “They (China) tend to have short-term bull markets and long-term bear markets,” he added.

Regarding another country, Indonesia, he said it was more influenced by the global commodity cycle. In South Korea, the country’s stocks are characterized by “depressed long-term valuations,” he said, due to poor corporate governance and low ROE. The Korean government recently launched a “valuation” program aimed at addressing this “Korean discount,” which has had some initial success.

As for Japan, the currency’s weakness is mainly due to the divergence of interest rates between the country and the United States, Chen said. “The Bank of Japan’s room to raise rates is very limited,” he said.

Chen said that in India, economic policy reform, in areas such as infrastructure, will continue, even though recent national elections were disappointing for the ruling party.

He concluded by pointing out that the increase in US tariffs on China had already been priced into the Chinese stock market. “Despite all this, Chinese companies will always find ways to accommodate it and get through it. China still exports a lot of products that end up in other countries.”