Headed up by our Chief Investment Officer, Richard Flax, our asset allocation team monitor the markets on your behalf, analysing market movements against the long-term goals of your portfolio, helping you stay one step ahead.
Debates at the Investment Committee for this rebalancing reflected the global economic and political backdrop. Whether it’s trade tensions coming from the US, political strain in the UK and across the EU, or tightening global monetary policy, uncertainty still presides across financial markets.
The Moneyfarm portfolios are fairly conservatively positioned, which we believe is a good thing in this environment.
What does a messy Brexit mean for portfolios
In the UK, Brexit negotiations have shown little sign of taking shape, with two high-profile pro-Brexit ministers leaving the government in disarray by resigning after voting in the Chequers agreement.
Brexit Minister, David Davis, and Boris Johnson, Foreign Minister, both handed over the reigns this week. It was unlikely these resignations would cause the government to collapse, but it does raise the question about a leadership challenge.
Adding fuel to the fire, US President Donald Trump said Boris Johnson would be a good Prime Minister, as he delivered an unwelcome blow to May at the start of his UK trip. He told The Sun that May’s Brexit blueprint would kill a UK-US trade deal.
The Brexit White Paper aims to ensure trade cooperation, with the potential for global deals for the UK, whilst avoiding a hard border for Northern Ireland. Many have called it a ‘hard-Brexit’ for services, although the deal suggests much closer ties than many Brexiteers had wanted.
As the Moneyfarm portfolios are globally diversified, UK exposure is relatively small so portfolios are somewhat protected from any Brexit-inspired turbulence.
Sterling did weaken on the news than Johnson had resigned, although not by much, which suggests Brexit uncertainty is already priced in by markets.
What changed in a higher risk Moneyfarm portfolio
As trade tensions have ratcheted up, the Investment Committee decided to trade some Emerging Market Equity exposure for Developed Market Equity. Trade-oriented emerging markets (EM) are more exposed to trade tensions than some Developed Markets like the US, although weakness in the Chinese equities market is exacerbated by domestic issues including credit growth.
Higher risk portfolios do continue to hold EM equity exposure, either directly or through global equities, for long-term return potential.
Equity valuations are still above their long-term average, and there was some discussion at the Investment Committee on what impact rising interest rates and geopolitical concerns could have on the asset class.
There’s a risk developed market equities could sell-off if the tightening of monetary policy isn’t managed correctly or geopolitical tensions spill over, but the Investment Committee believe solid earnings growth and robust corporate profitability should underpin the valuations for some time to come.
What changed in lower risk portfolios
Global inflation remains fairly well-contained, but it does continue to drift higher. Central Banks within developed markets seem keen to normalise monetary policy, even if it is at a fairly slow pace. This impact of a higher interest rate environment could be felt across global financial markets as it becomes more expensive to borrow money
The risk of a spike in European bond rates has increased due to heightened political tensions across Europe, including the UK, Germany and Italy. Considering the low interest (coupons) these European bonds can provide, the expected return of the asset class is low for the next few months.
Our asset allocation team decided to sell a portion of investments in global government bonds – given the current flatness of most yield curves and our expectation for rising yields over time. This adjustment reduced EU exposure and the vulnerability to interest rate rises in portfolios.
On the other hand, short-dated US Treasury bond yields are at their highest since 2008, as the markets start to price in the possibility of four rate hikes by the Fed in 2018.
The Investment Committee decided to introduce some positions in short-dated US Treasury bonds to lower risk portfolios. US yields stand some way above UK and European sovereign bonds at this point, and that pick-up in yield looks appealing. The IC debated the currency risk of introducing additional US dollar exposure into these portfolios but concluded that the portfolio risk was appropriate.
There was a debate around continuing to hold EM sovereign debt – given some of the risks discussed above. The Moneyfarm Investment Committee decided to maintain the position, arguing that the asset class looks relatively attractively valued at this point.
Did all portfolios get rebalanced?
Not all Moneyfarm portfolios needed to be adjusted to reflect our outlook. Some portfolios were already positioned in-line with the themes of this rebalancing.
The risk levels in these portfolios were also appropriate , and we’re not keen on trading just for the sake of it.
If you’ve got any questions about this rebalance, don’t hesitate to book a call with one of our Investment Consultants.
