Market conditions are brewing up a perfect storm for a 10 per cent correction during Q1 this year, according to Rathbone Unit Trust Management's David Coombs (pictured). 
The FE Alpha Manager, who is head of multi-asset investments at Rathbones, is therefore holding high highest-ever cash weightings across his portfolios.
His five crown-rated Rathbone Total Return Portfolio fund, for instance, now has a 35 per cent weighting in cash and cash equivalents.
Not only is he concerned about equity markets falling, Coombs says it is a struggle to find new portfolio opportunities across most asset classes.
While he has trimmed and added to existing equity positions, he says his asset class weightings have largely remained the same over recent months as there has been no catalyst for change.
“We dislike bonds, we dislike property, we dislike infrastructure, we are looking at commodities but they’ve had a bit of a rally so we’re holding some cash back for a bit of that. We don’t even like any of the alternative asset classes to be honest. It’s really tough at the moment,” he said.
“I do feel there’s a 10 per cent market correction waiting for us somewhere and I want to have cash ready for that.
“Markets have rallied so far over the last three months, which was right because I felt that the markets were trying to discount too much risk.
“Now I think they’re not discounting enough risk; I think they’ve gone the other way. I do think we’re going to have a lot of uncertainty, clearly, over the next few weeks and months. Markets are vulnerable and I want to have something in reserves to take advantage of that.”
A number of industry commentators described 2016 as a particularly difficult year for investors, given the high level of global geopolitical and macroeconomic uncertainty.
Despite markets pricing in some risk in the run-up to the EU referendum, the plummet in sterling as a result of the Brexit majority vote bolstered global-facing exporters and led to a market rally.
Markets also reacted positively to the election of Trump as US president, given his stance on fiscal expansion and tax deductions.
This led to a violent market rotation from quality growth to value stocks as investors increased in confidence.
Performance of indices since 2016
Source: FE Analytics
Given how far markets have rallied now though, Coombs warns that any hint of uncertainty could significantly derail the performance of equities.
“After Brexit and Trump, business carried on as usual to a certain extent and the markets looked at things a bit more dispassionately. They thought things weren’t so bad, off they went to the races and we had a Santa rally,” he said.
“I think that was right, I think market commentators were overly negative on markets and the markets actually shrugged both elections off. Yes, there were rotations within markets but, at an index level, they’ve carried on moving ahead as if nothing has happened.
“I am actually optimistic on the US economy and the UK economy, I feel that markets have caught up with this optimism and now I’m not sure if they are pricing in enough risk.”
Performance of indices over 1yr
Source: FE Analytics
“Brexit could be delayed or Trump could do something unexpected. It’s not what they do necessarily, it’s the market’s perception of what they do. Strategists and economists of this world are really struggling to understand what’s going on. I think investors are really struggling to understand what’s going on.”
While the manager is unsure what the exact cause of a market correction could be, he believes the risk of consensus suddenly turning negative is incredibly high.
Given how high market valuations are at the moment, he says this backdrop usually presents itself as an opportunity for a correction and warns that this could happen during the remainder of Q1 this year.
“Hopefully I’m wrong, I haven’t reduced my equity weighting at all so I’m still long risk, but I just feel the conditions are there,” Coombs said.
“On a 12-month view, I’m relatively positive on equities. I just feel it’s going to be a rough ride this year, rougher than we’ve seen for a little while.
“Because bond markets are so unattractive and there’s a lot of money going into equities, I’m not sure how long-term that money is. I’m just worried.
“Also, with the amount of money that has gone into ETFs over the last few years, I just feel the conditions are ripe for a disappointment somewhere.
“That disappointment could turn into strong negativity quite quickly and I will be buying like mad when that happens because, actually, I am quite positive.”
Since FE Alpha Manager Coombs launched Rathbone Total return Portfolio in 2009, it has returned 58.65 per cent compared to its LIBOR GBP 6 Month + 2 per cent benchmark’s return of 23.92 per cent.
Performance of fund vs benchmark since launch
Source: FE Analytics
It also has a maximum drawdown – which measures the most money lost if bought and sold at the worst possible times – of just 3.36 per cent over the same time frame.
In an article later this week, we will look at Coombs’s list of biggest potential wildcards that could derail growth in 2017.