“The danger is that the market might move ahead of the BoE,” he expanded. “The mistake that central banks make the most is getting behind the curve, then the market stops trusting them and starts to do the job for them.
“Gilt yields would go up because people would be more concerned about inflation, inflation expectations would go up, and the equity market will start discounting interest rates having to go higher than they would otherwise.
“That would have a knock-on impact on valuations within the market, because if bond yields are higher then equity market investments that are seen as bond proxies no longer look as attractive.”
Brace yourself
So, given this outlook, how is Thompson positioning his portfolio in anticipation of this potential scenario?
“While I am quite heavily exposed to the UK, I am lowly exposed to bond proxy-type investments,” said Thompson, referring to the 23.91% UK weighting in his portfolio.
“There are not a lot of utilities and consumer staples – the asset classes that are being invested in because they are seen as safe and yield significantly more than bonds, and will become not-so-safe as bond yields come back up.”
Overall, consumer discretionary and consumer staples account for 14.18% – his second-highest sector weighting – and 5.82% respectively of Thompson’s global portfolio, weightings which he plans to hold for the time being but intends to alter in time.
“In the meantime, there is a strengthening economy and some of the more cyclical areas are more interesting in terms of opportunities,” he said. “But there will come a point, further down the line, where that cyclicality will have to come out as interest rates go up quite quickly and enough to pull inflation down.”
