Defensive investing

The view from our Chief Investment Officer

22 March 2019

1 minute read

The global market has seen significant changes recently. Here, Will Hobbs discusses the impact, what it could mean for your portfolios, and how you can take a defensive approach.

One of our aims is to keep you informed of our current investment views – and how these themes can impact your discretionary portfolios. Toby Cross, our Head of Client Investment Solutions, talks to Will Hobbs, our Chief Investment Officer, about becoming a more defensive investor as sentiment continues to swing from one extreme to another.

Toby: Hello and welcome to another edition of Monthly Market Insights, where I’m joined by none other than our Chief Investment Officer, William Hobbs. Now Will, you’re going to have to help me unpick this. We’ve had...in US equity markets, December saw the biggest pull back that we’ve seen since the great depression, since 1929 and then in January and February quite rightly as your team predicted there's been a significant bounce back the like of which we’ve not seen since some of the momentous events at the beginning of the nineties. What on Earth is going on?

Will: Toby, it’s interesting because actually what you’ve seen during that period is that the outlook for the world economy hasn’t really changed that much and it’s a point we made last month. But what you’ve seen is that investors' perception of that outlook has changed markedly. So in December they were busily packing their bags for the dark descent into recession and then in January and February they have changed their minds. They’ve taken another look at the data and have decided that actually a recession doesn’t look imminent so you’ve found this sharp bounce back. Now the bounce back has also been accompanied by some better news on trade, some of the mood music around the negotiations between China and the US seems to have improved a little bit so people are pricing in a better outcome there, but like I say sentiment seems to explain a large part of those huge swings in markets.

Toby: Now, one of the things that you always counsel us and broader investors to keep in mind is to look through some of the news flow at the fundamentals and as I pointed out, you and the team told us to be wary of this volatility and indeed did predict that there would be a material bounce back. What’s happening with those fundamentals and what are you and the team seeing?

Will: Yes, so the fundamental outlook has deteriorated a little bit, so you’ve found that the world economy has slowed a little bit. Some of that looks from last year and the year before. Some of that looks temporary so Europe has run into a number of speed bumps which should pass, some of them. China has mostly deliberately slowed its economy and in the US, some of that fiscal juice that boosted the economy is starting to ebb. So you’re finding that the economy has slowed a little bit but the risks of a recession are still low on a 12-month horizon for us.

Toby: Right and that's an important point isn’t it? So what, if any, changes have you and the team made in the ready-made investment holdings or the discretionary portfolios that we hold?

Will: So you’ve rightly pointed out that the team had anticipated a bounce back in January and February and we were positioned in portfolios for that in our tactical portfolio, our shorter term portfolio we had a little bit more equity and stock markets than the benchmark.

We’ve now reduced that so actually for the first time since the first half of 2012 we’ve gone underweight equity, underweight stock markets in the developed world in deference to the fact that actually markets have gone a bit too far now, they’re actually a bit too "glass half full" on the economic outlook in our opinion.

Toby: And just to be clear when you say underweight you mean in association with our strategic asset allocation and that doesn’t mean we don’t hold any, it just means we hold fewer than we would have expected on a long-term basis. So just correct me then if I’m wrong, what we’re not advocating is a wholesale packing of the investment bags and getting out of the market, but we are seeing a little bit of a reduction in risk as some of those indicators soften, would that be correct?

Will: That’s exactly right and you’ve got to treat your portfolio always in two distinct segments: there’s the strategic asset allocation.

Toby: That’s the core.

Will: The core of your portfolio. And that’s the overwhelming majority of your portfolio and that’s really the mix of assets that’s designed to perform over the next 5 to 10 years. You don’t touch that very often, you trim it here and move it around every now and again. But your tactical portfolio is designed for something entirely different. It's designed to harvest opportunities out there from any asymmetries or disconnects in the market that crop up here and there because of emotional investing or various other non-economic actors in markets. These things can provide little opportunities to add to portfolios returns so I would see the moves that we’ve just described as very much in the tactical segment.

Toby: So there’s a sense for investors of keep calm and carry on as the t-shirts keep telling me in Regent Street. Will Hobbs, thank you very much for joining us and thank you for joining us. We look forward to catching up with you again next month.

The current landscape

There was a dramatic fall in markets late last year, and an equally impressive market bounce back during the first two months of this year. In response, we’ve dialled back the risk in our tactical asset allocation by reducing our allocation to the developed markets. While the risk in our portfolios has been reduced, we still believe that there’s a low chance of a global recession in the year ahead are. All in all, the outlook for the world economy remains reasonably healthy.

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