Coutts’ chief investment officer Alan Higgins said tightening by the US Federal Reserve next year could result in a 10% correction in US equities, which investors should view as a buying opportunity.
‘In terms of the tipping point [for equity markets], we’ve been more cautious in our allocation on the back of the knowledge that the US will tighten their monetary policy,’ he said.
‘The big risk is not China or Ukraine, it is US monetary policy. We know it’s going to happen and our view is that it will be later rather than sooner because [Fed chair Janet] Yellen and the Fed are very dovish.’
That said, Higgins anticipates a ‘tradable correction of 10%, rather than a crash’. ‘In terms of managing portfolios, you want to be reducing risk going into it and buying on the tightening,’ he added.
In the firm’s multi-asset balanced fund, which has a 55% allocation to equities, he has reduced his US exposure to an underweight 5.2%. This exposure is gained through two S&P 500 ETFs and the William Blair US Small-Mid Cap Growth fund.
Coutts’ team has also bought master limited partnerships trackers to diversify and play the US infrastructure theme.
In a contrarian call, he has upped his exposure to emerging markets (EM), moving overweight as he is encouraged that the strong outflows from the asset class have abated.
‘Being overweight EM is partially a reflection that developed markets, especially US equities are much more expensive, and there has been a value argument for some time,’ he said. ‘We are playing global growth momentum through a number of EM exporter companies.’
Within this segment of the portfolio, he holds the db x-tracker CSI 300 and the Lyxor FTSE MIB ETFs along with the Kleinwort Benson Dividend Plus EM fund.
Meanwhile, Higgins has maintained his Japanese allocation through currency hedged exposure to the Citywire Selection pick Polar Japan fund and db x-tracker MSCI Japan ETF.
‘We find value in Japan, and we like the corporate reforms such as the public pension fund overhaul and the introduction of the new benchmark for governance,’ he said.
In Europe, where he has a preference for Italy and Spain, he again blends active and passive strategies, and holds the Hermes Sourcecap European Alpha fund, managed by Citywire A-rated James Rutherford.
Domestically, Higgins holds a direct blue chip stock portfolio with holdings including Shell, Unilever, GlaxoSmithKline, HSBC and Diageo. As a play on China, Higgins is also backing BHP Billiton and Rio Tinto.
‘A lot of the bad news about China is in the price, so one way to play this would be to be long those companies, which also have attractive dividend yields.’
In fixed income, Higgins has sold ‘large chunks’ of his overweight peripheral debt exposure this month, but retained small positions in Irish, sterling-denominated Spanish and Italian debt.
Higgins’ largest fixed income exposure is the Pimco UK Long Corporate Bond fund, which comprises 6% of his portfolio and is managed by A-rated Ketish Pothalingam.
Seeking diversification, he recently introduced a 100-year maturity Mexican bond along with Slovenian debt. At the height of the strife in Ukraine, the team also bought a Russia 7.5% 2030 dollar-denominated bond, which sits alongside a 2.4% weighting to the Pictet EM debt (local currency) fund.
In performance terms, Italian sovereign debt, commercial property and Japanese equities have been positive drivers. Since inception on 15 November 2012, the model has returned 14.6%, with a historical volatility of 6%, versus a 14% rise in the ARC PCI benchmark.
In contrast, Higgins’s 2.1% exposure to gold mining stocks and the Citywire Selection pick BlackRock Gold & General fund, run by + rated Evy Hambro, have dampened returns, with emerging markets also a negative performer before clawing back some of those losses over the past six months.
BUY: Exposure to the NIKKEI 400 Index
‘Look to get exposure to the new Japanese corporate governance index’
HOLD: UK commercial property
‘It has an attractive yield of just under 6% and with the improving UK economy, it means there is some potential for rents to rise’
SELL: Peripheral European debt
‘It is a value story. The good news regarding some improvements in the Italian, Spanish and Irish fundamentals is now in the price.’