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Calm before the storm: what will tip markets over the edge?
by Eleanor Lawrie on Jun 25, 2014 at 07:00
James de Bunsen, a manager on Henderson’s multi-asset team, is holding a cash weighting of 10% in cautious portfolios. He believes unexpectedly strong economic growth could tighten monetary policy, spooking markets in the process.
‘We are a bit concerned that growth will be better than most people expect, perversely, as that could be bad news for most asset classes,’ he said. ‘We are still holding cash, which we do not like holding, but it is the only thing we can rely on to give us a bit of security if we get a wobble.
‘If the numbers come through stronger than [central banks] and the market thinks, then they could feel they need to raise rates more quickly. Too much growth is one of the things we are mindful of because that will affect everyone. If bond yields move up, it will affect equities as well. Everyone will run for the hills at the same time, and cash will be the only place to take cover.’
He cautioned investors against buying local currency emerging market debt in their quest for value, as he thinks valuations there are misleading.
‘Areas that look cheaper like emerging markets are slightly misleading because while on a headline basis they look cheap, that is because there are some huge state-run companies in there. They are cheap for a reason – namely that they are not run for the benefit of ordinary shareholders.’
Instead, the multi-asset team have taken about 2% out of high yield bonds and put it in to dollar-denominated emerging market debt.
Rob Burdett, co-head of F&C’s multi-manager team, has responded to the current lack of value by including an allocation to alternatives such as infrastructure and specialist property.
‘We are underweight fixed income, and neutral to equities. We are plugging the gap with absolute return funds and alternative assets which should be more immune to issues in the market should they arise.’
He said there are not too many signs of ‘irrational exuberance in the market,’ suggesting investors are already exercising a degree of caution. However he added he had spoken to some managers in his portfolio, who had ‘taken the heat out’ of their allocations following the violent reversal out of mid caps in April and May.
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