Rathbones’ head of multi-asset investments David Coombs has been selling domestically-focused stocks and buying overseas earners and index-linked bonds this week as Britain goes to the polls.
The manager runs more than £532m across the group’s multi-asset portfolios. He noted that, with markets remaining calm so far, it looks like a Conservative win has been priced in.
But with Labour gaining ground in the polls, he is not prepared to completely discount the possibility of a win for Jeremy Corbyn.
“The market is discounting a Conservative majority and it has been pretty stable all week - bonds, equities and the pound have barely moved, and for me that adds to the risk. The impact of a Labour economic strategy would be negative for sterling, domestic earning equities, and the bond market.
“As with Brexit, the populist strategy Corbyn has run has got traction, and if you add on the fact that the market has priced in a May win, that for me is a red light. I am not predicting a Labour win, but the probability of this has gone up to a high enough level that I needed to think about mitigating that risk.”
Mr Coombs said he was already light in UK domestic assets because of Brexit risk, but has now reduced economically sensitive stocks even further, particular in his medium and low risk funds Rathbone Strategic Growth and Rathbone Total Return.
The manager has completely sold out of FTSE 100 housebuilder Persimmon, which has had a strong run and is up 35 per cent year to date. He has also reduced positions in Land Securities, L&G, and Lloyds.
His equity allocation remains the same size as he has been replacing these holdings with UK-listed overseas earners such as Wolseley and Rio Tinto, as well as Asian and Japanese stocks.
In fixed income, he has been selling down conventional bonds including UK gilts, and switching into index linkers. He has also bought a Marks & Spencer USD corporate bond, and a Vodafone bond denominated in Swiss francs.
Having previously been running quite high cash positions across his portfolios because of Brexit risk, Mr Coombs has now put some of this cash to work.
His base case now is that the global economy is entering a reflationary period, and markets in the UK and US especially are underestimating the level of inflationary risk, especially if Brexit negotiations falter and the pound weakens further.