Peter Elston has begun to reduce his exposure to the UK market as "the direction of travel" is clear on interest rates, and the economy is moving into the mature stage of the cycle.
As well as reducing his UK equity exposure, Mr Elston is now holding more cash in portfolios he runs.
He cited unemployment in the UK being 4.3 per cent, wage growth having accelerated from 1.8 per cent to 2.8 in the past year, and inflation being above the central bank’s target rate of 2 per cent, as signs the economy is in the late stage of the cycle, before moving to recession.
Mr Elston allocates capital based on the "business cycle" theory of economics pioneered by Joseph Schumpeter, which takes the view that economies move in cycles from recession to recovery to expansion and maturity and then back to recession.
As an economy moves into the mature phase, growth will be strong, unemployment low, and inflation rising. It is at this point, according to Mr Elston, that central banks are putting interest interest rates up regularly in order to prevent inflation getting out of control.
It is at this point that Mr Elston tries to reduce his equity exposure. He began selling his US equities in about 18 months ago as that country began putting interest rates up.
In February the Bank of England’s chief economist Andy Haldane told the Treasury Select Committee he would need to see real wage growth, above target inflation and unemployment below 4.5 per cent as the conditions for rates to rise.
The market has been expecting a UK interest rate rise in May for some time but Bank of England governor Mark Carney warned yesterday (19 April) the Brexit negotiations may delay this because of the uncertainty they create..
This could act to drive inflation downwards and reduce the rate of economic growth, denting the need for interest rate rises and slowing down the economic cycle.
Mr Elston said even if this scenario occurs, "the direction of travel" on interest rates was clear, that they will move upwards. He added that if no deal is agreed with the European Union, then it was possible a recession would happen anyway, making his decision to reduce UK equities look prudent.
His view contrasts with that of Richard Buxton, who manages the £2.2bn Old Mutual UK Alpha fund and said the economy has only now reached a level where it has regained ground lost during the global financial crisis, so there is more capacity in the economy, rather than it being the end of the cycle.
Mr Buxton said he has "no worries" about the outlook for the economy.
Philip Milton, who runs Philip Milton and Co, an advice firm in Devon, said the FTSE 100 was trading at a substantial discount to other markets, and to the valuation of the bond markets, making it an attractive option for investors.
david.thorpe@ft.com
