Monthly Investment Briefing: Considering the Downside

Considering the ‘Downside’

We are always looking to invest for the long term in line with the risk profile, objective and capacity for loss that each client has stipulated; but we do review how the portfolios perform in times of volatility. We look back on the difficult market conditions of the autumn of 2018 the beginning of 2020, and most recently the beginning of this year. Our investment approach protects the downside for clients in line with the risk they want to take.

Keeping steady and focused

This has been relevant most recently as the messages from the US leadership has driven volatility that is tough to predict. As you know we took profits on portfolios in January, and added back some of the equity exposure towards the end of April, when investment markets were getting to be better value. We added to our theme of technology and have begun to build positions in mining and the hard commodities they produce, including gold. The positive returns we saw in May were pleasing but they were sharp and reinforced our decision to remain ‘neutrally’ invested taking our strategic asset allocation to equites, bonds and alternatives as our central position.

The bond market, especially in the US, is the ‘canary in the mine’ that we keep a close eye on, and the yield on US bonds has risen. If it climbs much above 5% it is concerning, but that is why we have such a low exposure to bonds in comparison to the rest of the industry (although they are catching us up).

The US Dollar and the Sterling Investor

We have had much debate within the team as to our approach to global asset allocation for a client who spends their money in pounds, shillings and pence. We know that the future growth opportunities are centred in the US and Emerging markets, but we have watched the US Dollar weaken against global currencies by 8% year to date, and we elected to slow down any reinvestment of profits into US equities as we feel it is a long term goal of the US leadership to weaken their currency vs the globe. We are now at a level where the rate of exchange is at the best it’s been for sterling investor for a very long time, for it to weaken much further you would have to go back a decade to see your £ buy so many $.

So, it’s good to have mitigated the USD weakness, but we are now getting to a level where if we did see another step down towards $1.40 that would then encourage us to add US equity to portfolios in a meaningful manner as you would be buying at over a 10% discount (in currency terms) than in January. Particularly if we see a US leadership misstep that pushes the US equity market lower at the same time.

Global economy continues to grind ahead

The macroeconomic numbers are reassuringly dull, we are seeing some lower numbers for new jobs in the US, but the unemployment rate is still at historical lows of a little over 4%. Inflation is stubbornly not falling but it’s not rising alarmingly either. The direction of travel for interest rates is lower but at a very slow pace: the days of 0.5% interest rates are well behind us. The bond market, especially in the US, is the ‘canary in the mine’ that we keep a close eye on, and the yield on US bonds has risen. If it climbs much above 5% it is concerning, but that is why we have such a low exposure to bonds in comparison to the rest of the industry (although they are catching us up). We are hopeful that the ‘budget hawks’ in the US senate will clip the wings of the ‘Big Beautiful Bill’ to give comfort to US Bond Investors. Lets hope that President Trump doesn’t get all that he has asked for.

There continues to be good opportunities to make money over the long term, but we do see the risks within the global political environment and thus are keeping our positions ‘neutral’ that balance the upside with the downside everyone sees.

Keith Edwards CEO & Lead Investment Manager