Having been neutrally-positioned heading into December, Royal London Asset Management’s Trevor Greetham has moved his multi-asset portfolio into an overweight position in equities despite being cautious on the longer-term outlook for the asset class. 
Greetham (pictured), who oversees the Royal London GMAP (Global Multi Asset Portfolio) range, said while he had anticipated October’s sell-off, the fall in markets in December came as a greater surprise and was characteristic of the higher levels of volatility witnessed during 2018.
As the below chart shows, the CBOE VIX index – Wall Street’s so-called ‘fear gauge’ and a measure of 30-day expected volatility of the US stock market – trended significantly higher last year after a quiet 2017.
Performance of VIX 2017-2018
Source: FE Analytics
“Global stock markets saw some wild swings and ended the year lower in sterling terms for the first time since 2011,” said the manager of the £114.2m Royal London GMAP Growth fund.
“We are late in the business cycle and stock market volatility is likely to remain high over 2019,” he explained. “Volatility usually rises about two years after the US Federal Reserve starts to hike interest rates. 2018 was right on cue.
“Markets tend to calm down again once interest rates have been cut and a new economic recovery is underway but that still feels a way off, so we should probably get used to wide trading ranges.”
Global economic expansion has continued since the global financial crisis – led by US growth – and the accompanying equity bull market has flourished, noted the multi-asset manager.
However, with doubts over the further longevity of the current expansion the upside for equities is now starting to be questioned.
“Global growth has been slowing for a year or so, led by China but European data also weakening markedly,” said Greetham.
Yet, the threat of a recession in the US economy – which was one of the causes behind December’s sell-off – remains unlikely, according to the multi-asset specialist.
He explained: “The US economy remains relatively strong on the back of Donald Trump’s tax cuts and spending increases. Jobs are still being created and real interest rates are low.
“The softening in US housing market indicators is a concern as housing can be a good lead indicator for the broader US economy.
“The lags are long however. If recent deterioration continues the usual relationship suggests a recession with rising unemployment going into 2020, not in early 2019.”
With the long-term outlook for equities likely to become more challenging, the Royal London manager said another popular asset class may come to the fore.
Increased volatility, plunging business confident and falling oil prices taking inflation out of the system – weakening the case for more rate hikes by the Federal Reserve – should create a more bond-friendly environment, according to Greetham, whose other funds include Royal London GMAP Balanced and Royal London GMAP Defensive.
As such, the manager’s proprietary ‘Investment Clock’ has move out of its ‘stagflation’ phase – characterised by slowing growth and higher inflation to a reflationary environment of higher growth and falling inflation.
Greetham’s ‘Investment Clock’
Source: RLAM
Indeed, Greetham said with expectations so low, growth could surprise positively with lower oil prices providing a good one-year indicator for US consumer spending, highlighting the collapse of prices last year.
Additionally, Chinese authorities have recently been stimulating the economy and hinted at further stimulus to come as they combat the negative effects of US president Donald Trump’s trade tariffs.
However, there are some potential challenges to watch out for.
“It usually pays to be bold when others are fearful,” he said. “We start the year constructive on stocks but we expect to become more cautious as the year progresses.
“There just isn’t much spare capacity in the US economy. A sharp recovery in China could lead to Fed overtightening, raising the risk of a full-blown recession in 2020.”
In the equities space, Greetham has been adding exposure to emerging markets while maintaining an underweight position in European stocks.
“Emerging markets have been beaten up and could benefit from the lagged impact of Chinese stimulus and potential dollar weakness if the Fed blinks further,” he said.
In Europe, the manager remains cautious given the many challenges facing the EU, including Brexit and other political challenges within the bloc, such as the stand-off with Italy over its budget.
“European data have so far been worse than expected and some of the weakness is due to internal issues with Brexit and other political risks growing,” he explained. “Despite the weakness, the European Central Bank could be quite far from altering its course.”
Brexit is indeed a concern with UK equities a slight underweight for the range, with the situation “deeply uncertain”, according to Greetham.
“There are many possible outcomes ranging from a no deal exit to a referendum on the final deal that could see the UK remain in the EU on current terms,” he said.
“Investors may try to hedge risks by investing across assets that will perform well in a range of different scenarios rather than positioning for any particular development.”
The largest fund in the six-strong GMAP range is the Royal London GMAP Growth fund, which aims to deliver growth over an investment cycle of approximately six-to-seven years.
Performance of fund vs sector since launch
Source: FE Analytics
Since launch in March 2016 it has delivered a total return of 22 per cent, compared with a 20.26 per cent gain for the average IA Mixed Investment 40-85% Shares fund.
Last year it made a loss of 4.66 per cent compared with a fall of 6.11 per cent for the average peer.
Royal London GMAP Growth has an ongoing charges figure (OCF) of 0.61 per cent.