Equity markets have risen significantly since the EU referendum, boosted by large-cap overseas-earning companies and headline-making M&A deals. Nevertheless, we have cut our exposure to UK equities in light of recent market conditions across six of its seven-strong range of model portfolios. The decision to reduce exposure was down to confidence in UK equities moderating somewhat as uncertainty looks to persist in the UK for some time.
With equities currently at the upper end of their trading range and valuations generally high, now was a good time to trim back. The hangover from the referendum is yet to be felt, reduced business investment and likely slower pace of hiring is still to come. Add inflation to the mix, hurting real wage growth and we think the outlook for household spending has deteriorated. This is likely to have an impact on corporate earnings and certain sectors will continue de-rating.
We decided to reduce exposure to UK consumer activity by selling some retail stocks and at the same time slim down weightings to financials, given the lower yield environment and ongoing uncertainties surrounding the financial services sector in general.
The investment team has used the recent cut in interest rates to increase the minimum weightings in fixed income across all mandates. The post-referendum relief rally has seen a sharp increase in appetite for risky assets but perversely risk-off assets have not sold off significantly. This is in part the search for yield, which keeps bonds well supported, but also reflects a reduction in the outlook for short-term interest rates following the Bank of England’s cut and hints of a further reduction to come.
Sterling rates are likely to remain low for some considerable time so we’ve increased duration. It makes sense to shift some cash into bonds to gain yield.
We also recently trimmed our commercial property in the lowest risk mandates, not because we turned bearish on the medium-term prospects for the asset class, but in order to “lessen the liquidity risk.” Thesis does remain upbeat on infrastructure as an asset class, adding to existing exposure. Relatively strong yields will remain well-supported in a low-growth, low-interest-rate environment. The prospect of fiscal stimulus accentuates the investment case.
Ryan Paterson, research manager at Thesis Asset Management