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How to position your multi asset portfolio for the rest of 2016

09 August 2016

Mark Harris, head of multi asset at City Financial, explains how he is positioning his funds for what is likely to be a volatile remainder of the year.

By Mark Harris,

City Financial

It is over a month since the UK voted to leave the European Union and it is increasingly tempting to view Brexit as a storm in a teacup.

To the surprise of many, the initial global economic impact appears muted so far. Survey data in continental Europe and the US have not yet detected a significant slowdown in economic activity.

General market contagion has also been very limited, with US equities reaching all-time highs, emerging markets rallying strongly and even UK equities trading comfortably above pre-referendum levels.

Performance of indices since EU referendum

 

Source: FE Analytics

Even though the global backdrop appears benign, we view the referendum as a significant economic and political shock. It is likely to have global ramifications and a significant impact on investment opportunities in the longer term.

The initial impact is already being felt in the UK. From an economic perspective, the first post-referendum surveys have shown an even sharper slowdown in economic activity than expected. 

Property markets are in the eye of the storm with a number of UK commercial property funds suspended to redemptions. It seems probable that the domestic economy will cool over the coming months, an environment in which more domestic-sensitive UK mid-caps may struggle to outperform internationally-facing large companies.

This has significant implications for fund selection, as many active UK managers are structurally overweight smaller companies. Ways to increase large-cap exposure include using index funds or investing in fund managers that have increased their exposure to larger companies, for example David Urch in his VT Garraway UK Equity Market fund.

In politics, Brexit has toppled the Prime Minister.

Theresa May replaced David Cameron after setting out an agenda of fighting injustice and standing up against the ‘privileged few’.  Her focus on inequality is an attempt to address the populist sentiment that propelled Nigel Farage’s Leave campaign to referendum victory.

Policy suggestions have included worker representation on policy boards and a crackdown on executive pay. We are hopeful that these ideas will form part of a profound reassessment in the role of the UK government, with the referendum acting as a trigger to address structural, long-term problems with the UK economy.

For similar reasons, we expect the referendum to act as a catalyst for change in economic policies globally.

The rise of Nigel Farage’s UKIP party is part of a wider rise in populist parties, also exploited by Beppe Grillo in Italy and Donald Trump and Bernie Sanders in the US. The UK experience illustrates the threat to governing parties from the unequal nature of the post-crisis recovery, exacerbated by unsuccessful quantitative easing policies.

It makes a change in the policy mix much more politically acceptable and we expect a gradual move towards more government spending and fiscal stimulus alongside more radical announcements from central banks. 

There is also little doubt that the current economic cycle is dependent upon stimulus and that more radical measures may be necessary to lift growth and inflation from stubbornly low levels.

If Brexit does indeed act as a trigger for a new policy mix and ongoing stimulus, it should create an opportunity for bonds to make considerable further progress. Therefore, we are not yet ready to strategically reduce our bond exposure.

Performance of index in 2016

 

Source: FE Analytics

It is also an environment in which gold should fare well. Low or negative interest rates mean that there is much less of an opportunity cost to holding gold, which typically benefits from growth and deflation fears. ETFs offer exposure to physical gold and gold stocks.

Fiscal policy change is almost always slow and uncertain. Progress is likely to be intermittent and crisis conditions may be required to force authorities to act.

However, it is certainly likely that the Brexit referendum has created the environment for change in the UK and elsewhere.

Japan may prove an important litmus test of global policy direction as Prime Minister Shinzo Abe seeks to arrest the apparent failure of his vaunted Abenomics policies to generate inflation.

 

Mark Harris is head of multi asset at City Financial. All the views expressed above are his own and should not be taken as investment advice.
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