A Glass Half Empty?
For those who’s glass is half empty, there is plenty to be morose about. Politics is the first area of concern. The run up to a General Election always causes a mass of speculation. But, add Brexit into the mix, and the whole thing has become a never ending stream of noise. In Europe, it is not just the Brexit story but the forthcoming French elections and worries over those later this year in Italy and Germany. Oh, and do not forget Greece – it has not gone away yet. As for America, the Trump Effect seems to lurch from good to bad in a matter of days. Then, of course, we have imminent nuclear destruction as the stand off over North Korea drags on. That does rather make news that the Chinese economy may be slowing slightly pale, somewhat, into insignificance. It certainly seems there are plenty of reasons to take risk off the table.
Or a Glass Half Full?
Interestingly, despite the volume of bad news, investors have remained pretty positive. Equity markets have largely moved higher and there is a sense of more good things to come. Despite the occasional blip – we mentioned the recent Chinese data earlier – the flow of macro news has mostly been good. That it has not been fantastic is also, in a way, a good thing. Why? Well, because it allows central banks to move towards ‘normalising’ interest rates at a measured pace and avoid the risk of nasty sharp, rate hikes. That said, quite what ‘normal’ looks like at the moment is subject to much debate. In any event, we see plenty of reasons not to take risk off the table. In fact, we see reasons to keep risk on the table. After all, whether the glass is half full or half empty, as the saying goes “there is still room for more beer.”
Topping It Up
As a result of this view, we have been quietly adding to a number of our positions. We have topped up our positions in the UK, where we are invested across all market sizes but with a bias on the medium sized to larger companies. Despite all of the negativity, it remains entirely possible that Prime Minister May has a cunning plan for Brexit and we view much of the European criticisms as little more than posturing. The recent UK economic growth numbers were low, yes – and the expected growth numbers for the Euro area are likely to be twice as high. But we do not believe that the UK economy is hobbling along. We still view it as robust and our mid cap domestically focused positions are a reflection of this.
We have also continued to top up our emerging markets positions. Here, we have a bias towards the frontier markets which we believe offer the most attractive set of opportunities. Of course such positions come with a degree of increased volatility. However, the lack of correlation between these markets brings a diversification effect too. We have funded this top up through a slight reduction in our Japanese exposure – the only place we have taken equity money off the table recently.
Elsewhere, our equity and fixed income positions remain unchanged. We are still keeping an allocation to precious metals as a hedge. Despite our optimism, we are only too aware of the likelihood of sharp pull backs, particularly at these levels. Some of the potential triggers for these were covered in our opening and there are, doubtless, other unexpected ones out there. But such pull backs, for us, would remain entry points and a chance to further deploy uninvested cash.
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