High risk portfolios: Investors stick with risk despite political twists
Money pulled out following Brexit is returning as markets stabilise, while managers adopt a wait-and-see policy on the US after Trump’s win
Alex Sebastian
The third quarter of 2016 could be defined as the bridge between two national trips to the polling station, both with huge significance for markets and investors seeking to profit from them.
As previously discussed, the result of the June EU referendum was digested by investors during the course of July and August, before the US presidential election came starkly into view in early November.
These political shifts had surprisingly little effect on how wealth managers positioned their high-risk portfolios in terms of headline numbers. Meanwhile, a large amount of movement in and out of various assets was taking place in the wake of the Brexit vote.
Equity allocations nudged down by 1% on where they were at the end of the second quarter, to 68% on average, representing a small risk-off move overall among firms taking part.
Had data been complied in the two days after the Brexit vote it seems certain this figure would have been much lower, but most of the money pulled out of the market on 24 June returned rapidly.
Risk-off moves
During this period, Canaccord Genuity Wealth Management and its peers tried to mitigate the dangers of the Brexit vote and US election while capitalising on any opportunities being created.
Chief investment officer Nigel Cuming says his was one of the many firms that made a big risk-off move as the surprise result was revealed, before piling back in as markets rebounded rapidly.
“We responded quickly by reducing our UK and European equites exposure, but that soon appeared to be the wrong thing to do so we reversed that,” says Cuming.
As markets stabilised, the attention of Cuming and his colleagues turned to the US, and the fast-approaching election there. “It is very easy to like the dollar and US equities,” he says.
“We expect dollar strength to persist as they raise interest rates. It’s particularly the case in relative terms when you look at the issue facing sterling and the euro.
“While other equity sectors such as Japan and emerging markets look cheap relative to the US, the time has not been right for us. With emerging markets, we particularly want to see how international trade policy will develop under the new president and elsewhere around the world before doing anything.
“What we have done is to target particular sectors in the US rather than US equities across the board.
“We sold a US equities exchange-traded fund and used the money for plays on financials, industrials and healthcare.
“Banks and other financials look set to benefit from rising rates and possibly lower regulation. Industrials will be helped by the infrastructure spending expected to come through and healthcare companies may see more favourable conditions following reforms in that area.”
Weighing up alternatives
Cash allocations also moved by 1% during Q3, climbing slightly to 8%, while alternatives holdings in the high-risk space rose, again by just 1% to 7%, on average.
Fixed income allocations across the high-risk portfolios of TMPI contributors crept up by 1% overall to 12% on average, representing the other side of the fractional risk-off move.
In fixed income, Cuming says Canaccord Genuity has cut back on long-dated bonds to fund some of the US sector plays. “Our recent asset allocation meetings have increasingly centred on fixed income.
“Looking at the UK, with higher inflation expected to come through, lower economic growth as Brexit approaches and higher interest rates coming in the US, you have to be careful with bonds. As a result, we are slightly underweight overall.”
