European Wealth's investment strategist tells us why they are underweight Europe and Japan.
'In March, we talked about the positive flow of economic data being countered by the wave of unpleasant geo-political news. Oh, if only we had known. Shortly after, the sabre rattling in the Korean Peninsula became more intense. In fact, if some of the articles a few weeks ago were to be believed, we are lucky to still be here. That said, it is hard to decide which problem makes one want to hide in a bunker more – madmen with nuclear bombs or the prospect of more coverage of the election.
Thankfully, equity markets have proved rather more robust than many expected. Despite the background noise, sentiment has remained buoyant. Expected volatility for most assets, other than fixed income, has fallen. This should be good for risk assets and, indeed, most have performed well. Emerging markets (EM) have come back into favour and the recent renewal of interest in European equity markets has seen some strong moves there, too.
Our recent deliberations around our tactical positioning started with European equities. And our view was very much that, yes, it does look a lot more attractive on the surface than it did in 2016. However, the concerns we had then still remain. These are much more than the speculation surrounding the French elections or those due in Italy. Greece has been under the radar for a while – a cynic might suggest that its problems are being downplayed as other big political issues are thrashed out. Who knows? Whatever the answer it remains a problem. In addition, Europe’s banking system is a mess and we simply feel that what was previously a ‘basket case’ is, in fact, still no better.
Having decided that we are happy to remain underweight in Europe, we moved to our other underweight. The US. We have to be up front and admit our US equity underweight is not the result of a dislike of that market. Our problem is that it represents such a large portion of our non-UK allocation that it becomes a ‘source of funds’ for areas we do want to overweight. In the US we are keeping our positions in the mid and small cap areas, where we believe the opportunity to benefit from a strong US dollar, economy and consumer spending will be found.
So what about those overweights?
One has changed – Japan. We have moved our positions to underweight. We have had longer term concerns of the country’s demographics for some time, but had been more positive in the shorter term over its economy. This enthusiasm waned in the face of recent data. We feel there are opportunities elsewhere and are switching part of this money into EM.
Long term, we have been very positive on EM for some time. In particular, we like the frontier markets where the demographic picture and growth stories are compelling in many cases. We are comfortable topping up these positions and accept that this comes with, perhaps, a rather higher beta than some other parts of our portfolios. We are still overweight Asia Pacific – although this has a high degree of overlap with our emerging allocation.
This leaves us with the UK equity market. Already overweight, we are topping up these positions. Despite the recent numbers showing economic growth has slowed, accompanied by the usual barrage of political expostulations, we still have confidence in the underlying growth. We do not see this as the Brexit-led loss of consumer confidence driving us over the cliff into recession. We are positioned across the spread of large, medium and small cap, but are actively avoiding broad-brush exposure to the FTSE 100 as we feel stock selection is critical.
We also like a good theme and our thematic allocation is focused on infrastructure and global equity income. Both of which have done well for us. We recently looked closely at infrastructure and have concluded that we want to continue to run this for the medium term. We are keeping an eye on medtech as a theme and this may feature in coming months.
So far, we have focused on equities – what else is there? Well, we do not like bonds much. We are still focused on the short duration lower risk areas of the bond markets. Cash plus also features highly for our lower risk clients.
Finally, we do have a significant allocation to gold and precious metals. We accept if equities fly it may be a drag on performance. So be it. If there is an upset it is expected to provide something of a hedge.'
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