Toby: Hello and welcome to another Monthly Market Insights where today I’m joined by our Chief Investment Officer, Will Hobbs. Will, we need to talk through the beginning of this year. It’s been tumultuous compared to possibly what we were expecting but investors have generally benefited from a bit of a bounce back in markets haven’t they?
Will: That’s right Toby. Watching markets these last couple of months has been a little bit like watching a particularly frothy teenager. You had the angst and deep depression that accompanied December’s performance and you saw the markets and investors started to price in the next recession. Now in our view at that time markets were over-reacting, there wasn’t the evidence in the economic data that we saw to give them that tilt. And since then in January we’ve seen a bounce back. People have generally wound back their estimation of recession risk so you’ve found that equity markets and stock markets have bounced quite handily for this month.
Toby: Now of course we’re positioned in the core portfolios that we run for clients to manage volatility and an expectation of things not being quite as good as they have been. Does this change in market sentiment indicate that you are going to make any changes to core portfolios?
Will: Well we have been reducing risk in portfolios.
Toby: Well let me stop you there because that feels a little counterintuitive. If the market seems to be recovering and recession risk is abating a little, why would we be reducing risk?
Will: So one of the things that we’ve looked at is essentially the sentiment idea that you find that sentiment can swing to extremes and that can give you the opportunity to act in opposition to markets in a sense, if you don’t think that the fundamental data is quite backing it up. Now in December we felt that actually markets were over-reacting to the downside so we’re quite happy to lean in the opposite direction in portfolios a little bit and that means owning a few more stocks in our portfolios than the benchmark.
Now the reverse is true. We’ve found that actually sentiment has swung back to a manic happiness towards the end of January and that’s left us a little bit uncomfortable holding the amount of equity risk that we did, so we’ve decided to pare that risk back again and essentially that’s just one of the ways that you can make a little bit of extra money relative to benchmarks.
Toby: But of course, we would still encourage investors to be looking at the long-term positioning and of course when we talk about reducing our equity exposure we still have a sense that we’re over-weight to those equity markets and more than we would have in a strategic asset allocation isn’t that right?
Will: That’s correct and just remember that the big part of your portfolio, that's the strategic part of your portfolio aimed at the long term, in a sense you’ve got a much steadier, leaning towards equity markets within that portion of your portfolio. The tactical part of the portfolio that we’re talking about here is really designed to play the swings in sentiment and the other stuff that’s going on in the foreground.
Toby: So multi-asset class portfolios are doing exactly what we would hope they do, diversifying and protecting against those unknowns and the tactical calls that you and the team are making, just taking advantage of any fluctuations and things that might be occurring in the news flow to interrupt markets. Now when we talk about news flow interrupting markets, of course Brexit remains on the front cover of every newspaper, particularly here in the UK. How have the developments in the Brexit saga been influencing your thinking and are there any changes that you might be making based on what we’re reading about Brexit?
Will: In a word, no. That’s not the end of it of course, the Brexit saga is something we’ve got to follow very closely but we continue to hopefully reassure our clients that the UK economy plays a very small role in even our UK-biased portfolios. That doesn’t mean the swings in Sterling cannot have an impact, but that impact is generally temporary, transitory, and so in reality we’re still looking to the health of the global economy for direction of our portfolios.
Toby: Well of course we have had a number of calls about Brexit. We will continue to keep up to date with those and I remember that you’ve said on numerous occasions to me ‘Toby you’ve got to remember that Brexit is a political problem and not a capital markets problem’ and of course that seems to be being born out with the way that markets are moving, so Will, thank you very much for an update and we look forward to catching up with you soon.