Key investment opportunities lie in asset class correlation breakdown

Recognising correlation breakdowns between asset classes would be the key to benefitting from any upswing in global markets, according to Philippe Jauer, Credit Agricole’s CIO, Global Fixed Income and Forex, Asia.

Jauer said financial markets have been in an “era of unprecedented high correlation” since September last year, meaning that virtually every asset class followed the same downward trajectory.

In highly correlated markets the benefits of diversification evaporate, correlations change abruptly and recorrelation adds convexity risk to portfolios, he said.

“This means that whether you have two or 10 strategies in place, the performance of the strategies will be the same when financial markets face fear or volatility.”

However, Jauer said he believes volatility will decrease, reopening the way for asset diversification and lower correlations.

He said some investors who have been able to identify decorrelation opportunities in the market were already achieving positive returns.

For example, he said some global macro-funds, which faced a difficult year in 2008, are now enjoying much better performances, having been able to extract value.

“From now on, diversified, value-oriented GFI portfolios are likely to do better as assets seem to be cheap all across the board, other than G3 Government bonds.”

He said opportunities were also emerging in currencies as they enable mixing relative value positions and long-term value calls through a systematic approach.

“Packaged into an effective solution, FX provides excellent risk/return within a global fixed income fund,” he said. “Importantly, they all come with what investors want: high liquidity.”