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Why one manager is selling-off US and European shares

Why one manager is selling-off US and European shares

Edward Park, deputy chief investment officer of Brooks MacDonald, has reduced his holdings of US and European shares despite the market rally.

He said he opted to sell shares because US and European equities have performed well due to movements of the US government bond yield, rather than a fundamental improvement in the outlook for economies or markets.

Mr Park's view is that the current market rally is short-term.

He said: "The US government shutdown has perversely helped support the rally.

"The US shutdown is simply because the country is close to reaching the 'debt ceiling,' which is the maximum number of Treasuries in issuance.

"This means that the US Treasury cannot issue as many Treasuries and therefore the squeeze on liquidity has temporarily slowed.

"The Treasury keeps around $300bn (£232bn) in cash to manage the government and this is now being drawn down on until the debt ceiling is expanded again.

"But short term this has created a more supportive market backdrop as the stored up Treasury balance is released into the broader economy and issuance remains under control."

Mr Park added this view has led him to reduce the investment management firm's US and European equity exposure.

Brooks Macdonald is also taking steps to halve credit exposure in UK Fixed Income.

Mr Park said: "This reduction in credit is due to concerns over liquidity as well as the rise of BBB as a proportion of the index which means the level of risk inherent in the corporate bond market has been gradually rising.

"As a result we are reducing exposure to funds which have either higher exposure to illiquid assets or lower quality bonds.

"This is the beginning of a path of travel in terms of guidance and we expect to cut equity and credit risk further into rallies."

Mr Park's view is supported by JP Morgan Asset Management's head of global equities Paul Quinsee, who noted many companies in cyclical sectors of the economy, including commodities, technology, industrial goods and automobiles, are already generating profits above the long-term average for those sectors.

He claimed this indicates that profits will revert to more normal levels and so the share prices will perform less well.

David Scott, an adviser at Andrews Gywnne in Leeds, has been moving many of his clients to cash in recent months, and buying alternative assets and gold.

He said: "Bears markets are horrible things. You need to go into them prepared, because problems will show up when they are least expected.

"2018 was a transitional year for global markets, as a 10-year bull market came to a close. It was built on the easy money of quantitative easing, which saw share prices soar while economies struggled to keep up.

"Now easing has turned to tightening, stock markets are feeling the pain. Your goal right now should be to protect what you have."