Vertem Asset Management's head of research gives us a snapshot into why the team has moved underweight fixed income.
'The investment team at Vertem convened prior to the end of September to set our asset allocation for the final quarter of 2017.
We moved to underweight fixed income in response to more hawkish comments from central bankers. There is a widening consensus that it is time to cautiously and tentatively withdraw some of the vast stimulus that has been applied across the developed economies of the world. The pace of withdrawal will vary and remain data dependent, particularly, where political risk is elevated such as in the UK.
Nevertheless, given that yields on offer in the higher quality areas of the market remain unattractive, we feel justified in reducing exposure.
Index-linked gilts have been reduced to a greater extent, owing to the long duration characteristics of these securities.
We are running a slight overweight position to equities, with varying levels of enthusiasm at the geographical level.
UK equities are neutral weighted; politics and market constituents must be considered independently. The international nature of the FTSE 100, and to a lesser extent FTSE 250, presents opportunities, while those more domestically focused are a heterogeneous group. Here, we debate the dynamics of poor investor sentiment and the individual investment stories of the companies concerned. We also seek to identify a catalyst for a re-rating, as without this, value cannot be created.
Having previously been modestly underweight US equities, the team decided to adjust this to neutral. While valuations can hardly be described as cheap, we noted dollar weakness and believe this to be overdone. In addition, tax reform presents a great opportunity for the US economy.
Of course, politics remains a notable obstacle, as does Donald Trump’s demeanour. But as president, he needs a significant win, with only a collection of executive orders to his name to date. Trump is also aware that tax reform is crucial to sustaining job creation and raising the living standards of those who supported him so enthusiastically during his run for office.
Europe and Asia
European equities were maintained as an overweight and this has been in place for a year. Overweight Europe has become a popular trade, but we hold the view that there is the potential for further earnings upgrades, as the economic recovery becomes more entrenched.
There are matters that require our attention, such as the events in Catalonia which need to be managed with great diplomacy as old antagonisms have been stirred. In this sector we like the Man GLG Continental European Growth fund.
Our Japan overweight was also continued. Shinzo Abe, a politician with an established track record of successfully executing a snap election, looks well placed to consolidate his position as the economy exhibits more positive signs.
Asia and emerging market equities are also overweight positions. In both cases, valuations appear relatively attractive given the earnings growth potential on offer.
For the former, we are not ignorant to the geopolitical risk presented by North Korea. It is very difficult to forecast the behaviour of capricious leaders, but we find ourselves surmising that a nuclear war is not in the interests of any country. The JO Hambro Asia Ex Japan has performed well, and in emerging markets we like Neptune’s Emerging Markets fund.
As a hedge against a miscalculation, portfolios hold positions in gold, oil, absolute return and long/short funds. Portfolios are neutral commercial property, as outside of a few subsectors, yield compression has run its course and rental growth is anaemic.'
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