Richard Flax, Chief Investment Officer, Moneyfarm
If we look at the US economy over the last six months, perhaps we can think about it as a three-way tug of war between manufacturing, services and the labour market.
Manufacturing has been weak for a while, services have generally held up okay, and the labour market has been quite robust. But if we look at the most recent data, we see that manufacturing continues to weaken, services aren’t as strong as it was, and the labour market – while still strong – is perhaps not generating jobs at quite the pace it was six or nine months ago.
So what does this mean for financial markets in terms of corporate profitability?
You’d expect weaker economic growth to translate into slower earnings growth and perhaps some pressure on margins.
In terms of policy, it raises the potential for the US Federal Reserve to cut interest rates further.
What to focus on in Brexit uncertainty
So, is there anything interesting left to say about Brexit, in the absence of any new information?
Actually, we think there’s one thing that was worth focusing on and that’s really around UK government bonds. Now, up until this point, UK government bonds have been a safe haven. When concerns about Brexit or global growth for UK growth have increased, UK government bonds have done relatively well and that’s what you typically expect.
The question is: will that continue to be the case or will investors start to want a little bit more yield to hold those bonds?
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Now, while the UK continues to print its own currency, investors are going to get paid from gilts – they’re going to get their money back. But the route there may not be as smooth for the price.
From a portfolio perspective, in the most recent rebalance we shifted our government bond exposure. We continue to hold government bonds across most portfolios, but we’ve moved away from the UK a little bit and that reflects our concerns that UK Gilts may not be quite the safe haven in the near future that they have been in the recent past.
Moneyfarm’s recent rebalancing
Against a backdrop of global uncertainty, the aim of our most recent rebalance was to manage our fixed income exposure, without impacting the expected returns of the Moneyfarm portfolios.
As our positions in global fixed income helped limit the impact of volatility over the last few months, the Investment Team looked to shift some of the UK exposure to take advantage of global opportunities.
In portfolios with a low to balanced risk exposure, the Investment Team reduced our positions in UK inflation-linked bonds in favour of currency hedged global sovereign bonds.
In higher risk portfolios, we increased the yield by swapping UK sovereign bonds short-maturities for global sovereign bonds sterling hedged, and global investment grade credit denominated in US dollars.
Since, the additional US dollar exposure has been hedged to maintain what the Investment Team views as an appropriate level of sterling exposure, we were able to pick up some yield without adding currency risk.
After this rebalance, Moneyfarm Portfolios are more globally diversified. By increasing exposure to the US, the Moneyfarm Portfolios are in a better position to take advantage of the Fed’s more cautious approach to monetary policy, which should support financial markets over the short-medium term.