The political noise does not warrant moving ‘risk off’
The opening months of 2016 proved to be rather better than many expected. There had been some pretty gloomy predictions, ranging from cataclysmic falls in equity prices to a collapse in oil. China was doomed, government bonds would implode, and the US Federal Reserve would kill off the cycle by raising interest rates.
As we remember all too vividly, equity markets had fallen sharply and it was an anxious moment. In fact, it all turned out rather differently. Most equity markets rose strongly, government bonds defied gravity and oil went up over 50%.
So, a year on, and the mood seems very different. There is much more of a sense of optimism towards the global economy. Forecasts of slower growth in China are seen as being more realistic. Higher interest rates in the US are interpreted as reflecting a more robust economy. As for government bonds, US Treasuries rose when rates went up. Commodities seem to be coming back into favour. Expectations of corporate mergers and acquisitions activity have increased. Did we just get out of the other side of the bed?
This more optimistic tone seems to be borne out by the macro economic data flow. Broadly speaking, it is pretty good. US growth seems to be solid, the basket case that was Europe actually turned in better growth last year than the US, and emerging markets seem to be back in vogue. In the UK, unemployment is low, growth is apparently robust, interest rates are low and we have a bit of inflation. Isn’t that what everyone has been desperate for?
With such a positive backdrop, why on earth would anyone move ‘risk off’? Quite possibly we are in a Happy Days scenario for equities, but don’t expect things to be smooth. The good macro data is being drowned out, at the moment, by the raucous noise over politics. But is it enough to warrant moving ‘risk off’? We do not think so. Some of the looming events, such as the French elections, certainly have the possibility of causing some nervousness – but any sharp pull backs in the near future would, for us, indicate entry points.
In recognition of the possibility of pullbacks, we have adopted a slightly more defensive position, bringing in some precious metals exposure and increasing our cash. Importantly, however, we remain overweight equities.
Short-term market timing is bordering on guesswork – so we do not intend to try to jump in and out as the coming months unfold. We are still overweight emerging and frontier markets, and are also overweight in the Asian and Japanese equity markets.
We are underweight in the US, where our focus is on smaller and middle sized companies with a more domestic bias. This is not to say that we dislike US equities, rather that we need to allocate elsewhere. Elsewhere includes the UK, where we are still significantly overweight having ‘repatriated’ some of our US dollar linked positions into sterling.
FIVE FUND PICKS
Artemis Global Income
The fund leverages Artemis’ well-founded equity income philosophy of focusing on free cash flow generation – and applies it to a global universe of stocks. While the fund is mostly fundamental stock selection, the manager, Jacob de Tusch-Lec, also employs a macro-economic overlay to integrate market cycles.
TwentyFour Absolute Return Credit
This is an ‘output driven’ fund, whereby it is run to generate a target return, at present Libor plus 2.5%. It is designed to have low levels of volatility by focusing on ‘low duration’, mainly investment grade bonds. TwentyFour are fixed income specialists and the processes they use to manage risk are exceptional, which is very important as interest rates steadily rise.
Charlemagne Magna New Frontiers
This is a very exciting investment opportunity over the longer term as there is a generational growth in these economies. The fund is a bottom-up portfolio consisting of 40-60 companies screened for quality and strong management. As a consequence, it has a low turnover and strong liquidity.
Baillie Gifford Europe
This is an extremely well-managed fund with a pure bottom-up approach. The manager concentrates on finding businesses with competitive positions and strong low turnover management, relying on them to weather economic cycles. As a result, the fund has a ‘buy and hold’ investment philosophy.
Old Mutual Gold & Silver
Designed to be a hedge against traditional equity and fixed interest returns, this fund acts as a diversifier to multi-asset class portfolios. The fund invests predominantly in listed gold and silver development and exploration companies.
Richard Stammers is European Wealth's investment strategist.