Reasons to be positive
Elsewhere, Stephens is positive on emerging markets, largely on valuation grounds. Markets had sold off significantly on a weakening commodity and oil cycle, and while commodity prices are unlikely to race away, they do seem to have stabilised.
Equally, he has no great concerns about China, in spite of the prevailing nervousness. “China will deliver whatever it needs to deliver, with the usual veneer of control and competence. Policymakers there would never allow a state bank to fail, for example.”
Equally, if there is some weakness in the US dollar after the election, it should benefit emerging markets at a time when valuations still look reasonably attractive.
Commercial property remains a useful source of income and capital returns, in spite of the potential disruption from Brexit. Stephens does not believe companies are likely to vacate London in a hurry. Those with headquarters in the City are not likely to make an instant decision and may simply set up a boiler plate business in Frankfurt.
The group is currently building a new range of portfolios with St James’s Place, due to launch early next year, for its recently launched international business. It believes too many offshore advisers are simply offered an offshore version of the existing UK range, denominated in euros or dollars.
Global offering
Stephens says: “The market is missing a trick. We realised the typical international investor advised by expat IFAs is not worried about the UK market. Often they are paid in dollars and want to keep their exposure in dollars. They don’t want a US dollar portfolio constructed from a UK perspective, yet many offerings start from that point of view.
“A typical adviser in Latin America, for example, might have expat clients working in the mining industry, getting paid in dollars, with no fixed residency and no idea where they are going to be resident in five to 10 years. A portfolio with a 5-60% weighting in the UK is not appropriate.”
The new range of offshore wealth portfolios from Rowan Dartington will look a lot more global. As an indication, the medium-risk portfolio holds around 6% in the UK but has 50% in the US because, Stephens argues, most people want US assets if they are paid in US dollars.
This can be tailored for clients in different parts of the world, he says. For example, Asean-based investors like investing in their domestic property market. While a typical UK-based portfolio might only have around 10% in Asia, the new Rowan Dartington range may have as much as 30%.
Stephens says the new portfolios have been created by “putting ourselves in the shoes of the client”, rather than rebadging a UK offering, which would give an expat client inappropriate exposure to the UK economy and all the uncertainty Brexit presents.
Given the volatility individual markets are experiencing with each new bout of political uncertainty, having a broader range of exposure and greater flexibility may be welcomed by advisers and clients.
Five key themes
Bear fruit – The level of bearishness provides some protection, suggesting that markets are unlikely to go too far south. There is so much cash around earning next to nothing that as soon as there is a sell-off, the buyers come in looking for bargains.
Even with all the uncertainty, the S&P 500 is only 4.6% below its all-time high at the time of writing. This is probably explained by the lack of appeal in other asset classes.
Top Trumps – Trump will have limited autonomy.Although both the senate and congress are Republican, Trump will not have a free rein to implement his agenda. Markets have proved relatively sanguine about his accession to date, in spite of initial fears.
Oil on troubled water – Beware inflationary hysteria. We need to take a step back and think about the drivers of this forthcoming inflation. First, the oil price rise is muted and unlikely to rise much above $55-60 as the days of $100 oil are long gone with the rise of fracking. Second, the fall in sterling only affects the UK economy, and rises in import costs will be diluted down as they find their way to the consumer.
No surprises – Interest rates are likely to remain low. The last thing the central banks are going to do is surprise investors with a rate rise. They know the damage this will do to their credibility when their whole projection over the past few years has been about open dialogue and forward guidance.
Cash is king – Retain cash to profit from inevitable volatility. This is an environment likely to create volatility. Retaining a reasonable weighting in cash provides some optionality to invest on dips in the stock market.
