Private client investment manager Investec Wealth & Investment (IW&I) is advising clients to reduce their holdings of UK and European equities.
IW&I’s latest Asset Allocation Committee (AAC) meeting has recommended a two per cent reduction of funds invested in equities for a balanced portfolio, with a reduction of one per cent recommended from UK equities and one per cent from European stocks.
IW&I has GBP24bn under management in the UK and the move equates to a reduction of approximately GBP430m in client funds from equities.
In reaching this decision, the AAC noted that equity market volatility had remained low for quite some time and was due an upward movement. Such movements occur frequently when equity markets retreat. Although downside is limited, expectations of an interest rate rise in the UK have already had an impact on currency conversion for UK based corporates, with approximately 75 per cent of profits for FTSE 100 companies originating from overseas activities. With UK GDP recovering strongly, the committee also noted the historically strong correlation between GDP growth and wage inflation. The Bank of England has noted that wage inflation is now one of its closely-watched criteria in assessing interest rate policy.
Looking at European equities, the Committee noted the strong returns achieved since the AAC recommended an overweight position in January 2013 and increased it further in July of that year. With Eurozone growth and forward economic indicators pointing to weak momentum – and the ECB’s forthcoming stress tests on the banking sector expected to weigh on investor sentiment in the near term – the Committee recommended a reduction in exposure.
The Committee’s recommendation is that funds withdrawn from equities are held in cash. Following these changes, a balanced portfolio under IW&I’s discretionary management will contain 36 per cent UK equities (-1 per cent), six per cent European equities (-1 per cent) and five per cent cash (+2 per cent).
Chris Hills, chief investment officer at IW&I, says: “The underlying case for still holding equities remains strong, but having achieved strong returns over an extended period, we believe now is the right time for a balanced portfolio to reduce moderately its exposure to equities and take some profits. Our judgement is that, in the near-term, sentiment towards UK equities is likely to be affected by the strong pound, which is already acting as a drag on corporate profits, while persistently weak economic growth is likely to have a similar effect on Eurozone equities.
“Meanwhile we see fewer reasons for international investors to buy UK and European equities on market weakness, as has been the pattern now for some time. In the UK, the timing of the first interest rate rise is an unknown (albeit not far off), as is the outcome of the referendum on Scottish independence in September. In Europe, the ECB has limited room for manoeuvre while the outcomes of bank stress tests may increase market volatility for some time. Internationally, geopolitical risk has increased markedly in recent weeks.”