Portfolio Update

Posted by melaniebond

Following recent updates on the impact of Coronavirus on investment markets, we have made changes to the portfolios this week.

We have sold out of our Chinese and Asian holdings, as well as reduced our Property weighting in some of the lower risk strategies. China and Asia had held up reasonably well after the initial falls, however, there is a wall of negative economic data to come from this region and logic would suggest that even with China pumping stimulus into the economy, there should be a downturn in market sentiment and performance.

The Kames Property Income fund has been sold, whilst we retain our BMO holdings and the HSBC Global Property in a score 2 strategy. There are no new warnings on the property sector at the moment, but we have been monitoring the Kames fund and whereas our other holdings have a track record in particularly volatile markets with sufficient liquidity reserves, the Kames fund has not picked up in the way the BMO UK Property fund has in recent times and yet they are two very similar strategies. We are pre-empting any concerns which may grow around liquidity in the property market, which in turn has a knock on effect on many property funds by selling out ahead of any sustained period of volatility ensuing.

For now, have maintained our UK weighting, with a small amount in emerging market equity. The Chancellor of the Exchequer is due to announce his first Budget under the Boris Johnson regime next week and we feel that there may be market friendly measures announced in that report. If anything the Coronavirus may increase the need for stimulus measures to shore up market weakness and provide a sentiment boost. If this happens, we may see a positive reaction in the UK FTSE indices and so we have waited to see what the Budget brings before selling down the UK prematurely. Our UK weighting has a value bias and whilst this hasn’t been in favour in recent times, the underlying holdings are the ones which will survive any market downturn and aren’t laden with debt from overshooting growth that leaves them vulnerable. That said, if we don’t see a positive reaction to the Budget, we will continue with our strategy of de-risking portfolios, as the markets trend downwards for now.

The US announced an emergency interest rate cut earlier than expected this week. This has had a negative effect on markets and certainly hasn’t provided the stabilising influence the Federal Reserve hoped for. In part this is because the US markets have been so highly valued for so long, in many respects people have been waiting for a reason for the market to re-set. In other ways the ineffectiveness of cutting interest rates in the US has been taken by European markets as a symbol that further weakening interest rates by the European Central Bank into even more negative territory won’t help and individual countries need to take fiscal action to halt the decline. Having assessed the result of the emergency Federal Reserve action, we have sold out of our US allocation for now. The US has performed extremely well in recent years, but valuations have been inflated for some time, hence our reticence to invest further in the region. With the market at such a high point, any corresponding fall could be equally extreme in the other direction and so we will wait and see how the market responds in the coming weeks to both the spread of the virus and the US Democrat candidate votes.

The US 10 Year Treasury yield is currently sitting at an all time low, which is quite remarkable given the economic crises we have seen in recent times. We continue to think that the most likely outcome of this latest bout of market weakness may be short lived, but nonetheless we are taking steps on the premise that it sets in for longer.

We have increased our Fixed Interest allocation in lieu of equity, purchasing Gilts, Index-Linked Gilts, Overseas Government Bonds and high grade Corporate Bonds. We have sold our Emerging Market Debt allocation from the Fixed Income space for now, simply because this asset class tends to react sharply to currency movement and equity market sentiment. We would expect Emerging Market Debt to return to portfolios fairly swiftly, however, if we see the sentiment calming. This additional Fixed Income tends to perform well when equity markets retract and will provide both an opportunity for positive returns and reduced risk in the weeks ahead.

The situation is fluid though and this is a time for investment fundamentals. Own Fixed Income when the time is right and be choosy about the type of credit one owns and where equities are retained, own strong companies with surplus cash on the balance sheet who have enough in reserve to both exist and continue to reward investors with dividends when we come out the other side.