Rothschild Wealth Management is sticking with equities as a preferred asset class even though stocks are, in some markets, looking stretched in valuation terms.

Rothschild Wealth Management is sticking with equities as a preferred asset class even though stocks are, in some markets, looking stretched in valuation terms, while it is avoiding longer-dated bond maturities to avoid being hit by a normalisation to interest rates.

The wealth manager said the global economic outlook remains positive, even though recent data suggested a slower-than-expected rise in US growth. Capacity utilisation is high in developed markets and capital stock is ageing, suggesting higher capex spending down the line.

The blue-blooded wealth management house sees two main risks: a rise in core inflation that is faster than the US Federal Reserve thinks and the fact that markets are still struggling to understand the direction of US monetary policy under the new Fed head, Janet Yellen, it said.

“As a consequence, we believe the current period of low volatility across most asset classes is a short-term phenomenon. Investors should be prepared for more volatile conditions,” said Dirk Wiedmann, chief investment officer.

The firm noted that the VIX Index, which is a measure of US equity market volatility by tracking options prices, has fallen to 12 recently, one of the lowest levels since before the 2008 crash.

“Yet low volatility is a global phenomenon that includes all major asset classes at the moment. This trend suggests investors around the world remain complacent of any potential risks. The situation is a cause for concern because previous periods of complacency have often been followed by less benign conditions in financial markets,” it said.

On equities, Rothschild favours the asset class due to abundant liquidity and repressed interest rates, which support markets and improved earnings prospects.

In the case of fixed income the firm said it is avoiding long-maturity nominal bonds because they would be negatively affected by a return to more normal monetary policy in the “economic renaissance” scenario.

“Within fixed income we continue to like shorter-maturity corporate bonds. This part of the market has two attractive features. First, there is still a decent yield advantage relative to government bonds. Second, the short maturity offers some protection against rising interest rates,” Wiedmann said.

In terms of adjusting to any unexpected spike in inflation, the firm said it is focusing on hedge funds to deal with this eventuality. It also has exposure to hedge funds that give significant protection in the case of an equity bear market. It also has direct equity hedges via out-of-the-money put options on broad indices.