BRI Wealth Management's head of investment management and CIO explains why we should beware the 'eeriness' around the market.
'When asking a stranger how to get to a certain destination, the old joke is ‘well, I wouldn’t start from here’.
It is easy to find cautious news and bearish views surrounding the economy, politics, equity multiples and real global bond returns. There is a strange eeriness against this backdrop of record low volatility and it is easy to put the resilience of markets down to the rapid growth of index trackers and the insatiable hunt for yield. This undoubtedly makes investing harder than in previous cycles.
Whilst taking profits can be easily justified, receiving a new client sitting solely in cash can present a reluctance to invest aggressively when many renowned experts are pointing to the end of one of the longest bull markets in history.
We remain cautious on fixed interest as an asset class. We are not favouring the current negative yield after inflation and are wary of the potential capital performance should Taper Tantrum two develop. Alternative investments providing a respectable yield continue to make up one defensive element within portfolios in this environment, providing liquidity to take advantage of more attractive investments when they appear.
Looking at developed markets, the US continues to be a strong performer and we are now rotating slightly away from more expensive stocks. As many funds have a high weighting to Facebook, Amazon, Netflix, Google (Fang), we are increasing our exposure to more value-based investments, hedging slightly against the market easing.
Europe has performed particularly strongly this year and we are still looking for continued economic growth supporting a strong euro, certainly relative to sterling.
Looking at UK equity exposure, the declining economic and consumer statistics coupled with falling confidence brought about by the weak political backdrop (two years of forthcoming Brexit uncertainty), point us to stay more internationally focused.
Our view of sterling remains, it is historically cheap, but can see little to no change in the foreseeable future. Quality UK companies with a strong cash flow, in a niche or dominant market position with international exposure will continue to grow. Many solely UK-focused stocks have been underperforming and we expect this to continue in the short term.
Concluding with another old adage: ‘It is better to travel than to arrive,’ we are cautious as the journey has already been long and quite fun and if we do ‘arrive’ it may not be a pleasant disembarkation.'
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