Add to this a hugely unpredictable election and the weakness of the UK’s largest trading partner, Europe, and you might come to be in a similar mind set to fund manager Ryan Hughes (pictured).
Hughes, who is part of the management team at Apollo Multi Asset and the lead manager of the FP Apollo Multi Asset Balanced fund, believes it is prudent to keep UK exposure low at the moment.
He said: “With only months to go before the UK election, we can see a number of headwinds that have the potential to hold back returns from UK equities.”
“As the election date gets closer, volatility in UK markets is likely to increase and the pervasive issue of ‘home bias’ looks less appropriate than ever.”
This year’s general election has been described by many as the most unpredictable yet and Hughes believes it’s too close to call. With no clear outcome, he believes that the possibility of more radical, smaller parties being part of a coalition government will cause further volatility in asset prices.
However, Hughes does not remain optimistic about the possibility of any of the larger parties gaining power, either.
“The election could cause volatility regardless of the outcome. If Labour win or form a coalition, the market could be perceived as less business-friendly,” he said.
“Companies could potentially get hit by additional taxation or higher costs for running their business. In the run-up, that will make people wary as to where UK equities might go over the next few months.”
Hughes’ prognosis for a Conservative-led government or coalition is also fairly bleak, due to the looming EU referendum they would bring with them.
He explained: “It’s one of those where, initially, you could easily see quite a strong market rally on the back of a Conservative victory or coalition.”
“I do think though that, very rapidly after that, people will start turning their minds to the referendum and think about what that’s likely to do for the UK economy and the risks it will bring in the short term, and what that means for business.”
“This could easily deter foreign investors from buying in the UK, and it could deter UK chief executives from investing in their own business and wanting it to grow.”
Hughes believes that the referendum could easily cause headwinds for UK equities all the way through until a run-up to the yes/no vote, which could prove detrimental for investors.
However, he remains cautiously optimistic about the impact the election will have on consumer habits.
He said: “The consumer is relatively robust at the moment and probably quite insulated from the volatility of the market. We all live and work in the bubble of the market and so it affects us every day, but I don’t think it has a huge impact on the consumer.”
“One thing we might see is a weakening of the sterling, which many consumers will see as a benefit when they go abroad, so from that perspective that could actually be a positive for them.
“However, the election is going to dominate the headlines now up until May and beyond, so if it’s on the front story of newspapers and it’s the main story on the 6 o’clock news then that certainly puts a thought in people’s minds as to how it will impact them.”
Hughes has cut long UK equities out of his portfolio completely and the only UK fund he has kept hold of the Henderson UK Absolute Return fund, which is headed by the FE Alpha Manager duo of Ben Wallace and Luke Newman.
Performance of fund vs sector over since launch
Source: FE Analytics
He said: “In the Balanced fund, I only have exposure to long/short equities at the moment. I think this approach could take advantage of that volatility we’re likely to experience, and the long/short strategy I think could be a smart way of playing that.”
“[Wallace and Newman] are a very experienced team. They’ve lived through volatile events in the past and I think that these types of managers thrive when there is volatility.”
“Part of the challenge for the long/short managers in recent years is that there hasn’t actually been very much volatility, but now I think we’re entering a period where it’s starting to pick up and that’s the environment where a good long/short manager will thrive.”
Changing the shape of his fund to cater for a potential bout of volatility, however, has led to Hughes dropping his main UK equity holding.
He explained: “The Cavendish Opportunities fund is kind of a very ‘special situation’ fund, very small- and mid-cap focused.”
“I think in the short term, [altering the portfolio] is down to a combination of two things. I think firstly, it’s observing the UK and seeing the headwinds, but it’s also just seeing better opportunities elsewhere,” Hughes said.
“For instance, seeing the growth opportunity in Europe and seeing the opportunity for earnings recovery in Japan, so it’s two sides of the same coin, really, in terms of reducing that UK equity exposure. But Cavendish was the main holding to be removed.”
Performance of fund vs sector and index over 8yrs
Source: FE Analytics
Despite seeing a growth opportunity in Europe following quantitative easing (QE), Hughes is still treading carefully around investments on the continent.
He said: “You’ve got QE in Europe, which is great, but on the other hand you’ve got Greece. The Greece issue has not gone away, and there was an initial euphoria last week when Greece made some kind of deal, but all that did was just say ‘well, we need to sit down round the table again and discuss this some more’.”
“Actually, subsequent to that, most signs that we’re seeing are saying that there’s a chance of the deal unravelling. Those types of risks, I think, are large, and yes QE is great and everyone loves the idea of a bit of free money, but the political, economic and social risks that remain in Europe are still significant in that they shouldn’t be forgotten.”