ELLIOT FARLEY, manager of the T. Bailey Dynamic Cautious Managed fund and Defensive Cautious Managed fund on Asset Allocation
Now is the summer of our discontent. The markets look as unsettled as the weather – and just as unpredictable.
The macroeconomic news is gloomy; leading indicators are rolling over; the global liquidity position is tightening, and there is little sign from central banks they are ready to inject more liquidity.
Ben Bernanke agreed to reinvest proceeds from maturing mortgage-backed securities, but this merely maintains the liquidity status quo. The aftermath of the sub-prime carnage remains in the US, with the housing market struggling and consumer confidence rocky. The hope was that, having led us into the recession, the US would continue to lead us out. Now that is looking less certain.
It is clear in the developed world we are adjusting to lower growth expectations and that is bound to be unsettling. When you step back from growth levels of 3%-4% to just 2% you are operating much closer to the precipice. The risk of a double-dip and deflation become much greater. It is not surprising if we all tread a little more cautiously.
Even those with a strong appetite for risk are struggling. The problem is, it is difficult to see where the next positive news will come from. No asset class is screaming ‘buy’.
In the circumstances, within our multi-asset portfolios we are making sure we are diversified across a broad range of asset classes and taking some risk off the table. That leaves more firepower available should conditions change or opportunities open up.
On the more positive side, it is worth reminding ourselves (having spent too much of recent weeks, it feels, under an umbrella) this is the summer. Trading volumes are low and that distorts the picture.
Looking at asset classes in particular, the big story has been falling yields on government bonds with UK, German and US bond yields down to record lows as investors scramble to reduce risk. However, it is very hard to see a great deal of value in gilts now in view of the current outlook for inflation.
High-yield bonds look much more attractive. We have done well out of these in recent months – along with strategic bond funds – and there is a margin of opportunity here still for fair returns. We have also increased our allocation to gold, which we believe has the potential long term to rise significantly further.
Equities look generally fairly priced, though we remain negative on Europe and hold no European funds at the moment. We have increased our exposure to the Asia Pacific and emerging market regions, with a particular bias to Brazil in the case of the latter – at the cost of our US exposure.
Elliot Farley is manager of the T. Bailey Dynamic Cautious Managed fund and Defensive Cautious Managed fund
