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Royal London Asset Management (RLAM) multi-asset head Trevor Greetham has reversed his original plan to buy equities in the event of a Brexit vote, instead opting to bide his time until a possible summer dip emerges.
In the run-up to the referendum, the manager had intended to add to stocks if the UK voted to Leave, but has admitted both this outcome and the speed of the market reaction caught him off guard.
As a result, he has moved underweight European stocks in his Global Multi Asset Portfolios range, “parking” money in the US and fixed income while he plans his next move.
“We expected the vote to cause an equity market sell-off which would be a buying opportunity but it was ‘blink and you missed it’,” he said.
Having failed to take this opportunity, Mr Greetham said he had instead chosen to pare back his “significant” fixed income underweight, and cut his overall equity levels from an overweight to an underweight position, with Europe the focal point of his pessimism.
“Europe is more exposed to Brexit than the UK. Weak sterling is translationally positive [for domestic stocks], whereas this and a weak UK economy [affects] Europe.
“With some euro versus sterling currency strength and some bad economic data in the UK, it will put more pressure on Europe, and financials will lead that underperformance.”
| KEY NUMBERS |
4.4%: Barclays Sterling Aggregate Bond index return since UK decision to leave the EU 1.27: RLAM global equities composite sentiment indicator (above 1 implies ‘euphoria’) |
While his bearish sentiment on European stocks is a long-term stance, the reduction in equity exposure was only temporary. The manager said he expects to come out of the summer period with a higher allocation, having moved from fixed income and US stocks into emerging markets and Japan.
“Really, it is just parked [in the US] until we can add emerging markets and Japan. If we get a dip in markets, the US will outperform further and we will use that money to buy areas of the world where there will be stronger growth.”
Mr Greetham said he expected summer dips because the season is traditionally a volatile period, and RLAM’s market sentiment indicators were producing concerning readings.
The manager claimed equity investor sentiment is flirting with “euphoria”, suggesting many are complacent about the economic consequences of the UK’s Leave vote.
“That on its own is not a sign that markets are going to drop; positive sentiment can last for weeks at a time. But there will be wobbles,” he said.
“If we get dips in the stockmarket over the summer, the areas we want to buy are ones that would benefit from loose policy but would not be affected by Europe.”
Mr Greetham’s trusted ‘Investment Clock’ tool is still pointing towards positive global growth. However, his funds remain “neutral” on UK equities, due to the manager’s concerns about sterling’s direction.
“Even if we knew which way sterling was going, it depends on why. If it was weak because of monetary easing then the large caps would like that. If it was because of a lack of confidence they won’t like that.”
“There seems to be a lot of risk in UK equities, in both directions, so we’re keeping it neutral,” Mr Greetham said.
The funds’ fixed income underweight before the vote ended up being “a painful experience”, he acknowledged. But the referendum result, coupled with expectations for Bank of England (BoE) action this week, mean he has stayed underweight, albeit to a lesser extent.
“We don’t think it’s appropriate being very underweight bonds going into the BoE August meeting, as it will be looking to almost overdo stimulus,” he said.
