A 10% share price fall in the value of a FTSE 100 mainstay is not the ideal backdrop to a conversation with an investment manager who even bears feel has a gloomy view of the world. The announcement by Barclays last month that it is going to slash dividends and sell off its entire business in Africa, where it has had a presence for 100 years, was not the positive mood-setter I had hoped for when meeting Nigel Cuming, the chief investment officer at Canaccord Genuity Wealth Management.
Annus horribilis
Summing up his predicament as chair of the wealth manager’s asset allocation committee, he lists his key current concerns.
“It was an extraordinary start to the year. We have seen worries about Chinese growth prospects and the fragility of their banking system, a collapse in global bank shares; a blowout in higher-yielding bonds exacerbated by poor liquidity conditions; general nervousness about declining world trade and the growing risks of a recession in the US; we’ve had sovereign wealth funds as forced sellers and equity markets responding negatively to a falling oil price. And all in the first two months of the year.”
And this is on top of him having already turned more cautious at the end of last year when it was time, he says, to ask what economic benefits quantitative easing (QE) had brought instead of continuing to follow the QE-inspired market rally everyone had been playing. “We have a situation where QE has obviously inflated asset prices, whether you are looking at equities, bonds, cars or art and other collectibles. Part of the initial market weakness this year is attributable to a sense of weariness with QE.
“People are beginning to ask what it has actually done in terms of creating sustained growth in the real economy. The answer is very little,” he says.
He would like to see a shift in where money is being spent in the coming years. “What we should expect over the next few years is a greater emphasis on doing things for the real economy, such as infrastructure spending to create jobs, rather than electronically creating money to drive down bond yields to, in some countries, below zero.”
Cuming is a top-down man, thinking mostly about the greatest macro influences on asset allocation. Fund selection decisions are made by committee, with head of unit trust investment Mark Piper as its chair, alongside Cuming’s deputy chief investment officer Justin Oliver.
So what of the big debate of the moment in Cuming’s world, the potential for a Brexit? He says that whether the case for remaining in the EU is right or wrong, there is a lot to be said for the status quo, and negotiating for improvements for the UK from within the European Union.
He says: “The uncertainty that the UK faces until June will weigh heavily on investment, growth and employment. Should the UK vote to leave the EU, the uncertainties, whether in negotiating the terms of exit or a new trade treaty, will weigh very heavily on the UK economy, currency and markets.
“I worry about that, especially when the UK has a lot of structural issues in terms of an inflated housing market, and an ongoing debt mountain, not to mention declining invisible earnings that historically have tended to underpin UK finances.”
The word ‘uncertainty’ comes up a great deal in conversation with Cuming, based in part on the increased volatility this year and the lack of any positive change in any risk assessment as a result.
He admits that some of this uncertainty is already priced in but follows up by adding “but you have got to be nervous of uncertainty in itself”.
What is also disconcerting is that ordinarily downturns bring sell-offs and opportunities somewhere along the line, but Cuming does not see too many out there.
“My colleagues on our asset allocation committee – we are an eight-man committee – really wanted to buy the dip, and in fairness this would have been at the very least a decent trade.
“However, because of the factors I mentioned earlier, I just wasn’t happy to, especially as we were already at a near benchmark weighting to equities and I did not think that the then-prevailing level of uncertainty justified an overweight. So at the moment we are trying to steer a middle course through the uncertainty,” he explains.
“Our preferred asset class on a six to 12-month view remains equities, but in the short term I expect equity markets to remain range bound.”
Middle course
While it varies across the mandates that Canaccord Genuity Wealth Management runs, this middle course means being biased towards equities, with 40% in fixed income and alternative assets. Instead of referring to ‘cautious’, ‘balanced’ or ‘aggressive’ strategies, Cuming now invests on behalf of risk profiles one through seven, across three currencies, with income versions of many of them.
