Hugo Thompson

The tides have been turning: after a pretty choppy first half of the year, markets started to rise again. This has been great news for our portfolios which have successfully captured that rebound. The question is: where will the winds blow next, and how should we chart the forward course for our portfolios? Our view is that there will be three key themes driving markets over the coming  months:

• A sunny economic horizon: our positive view on economic growth has worked this year, and we are staying that course. Companies profits are buoyant, activity indicators are positive, and governments are stimulating growth. To capture this trend, we’re maintaining an elevated exposure to equities and high yield bonds, which tend to perform well when companies are healthy, and inflation and interest rates are elevated

• Fundamentals take the helm: last quarter we broadened our equity allocations to help steady the portfolios as shifts in U.S. policy created choppy markets. That worked well, and we benefited from the wave of strong returns in the UK, Asia, and Japan. However, as the fog of policy uncertainty starts to clear, we believe that markets will once again be driven by fundamentals, with returns focused in the strongest companies. We have added to US equities, where profits remain high, and Emerging Market equities where earnings are strong and companies look cheap. We reduced our UK and European equity exposure, as the ‘catch-up trade’ that we saw earlier in the year has mostly played out in our view.

• Mind the debt iceberg: rising government borrowing, particularly in the US, could undermine the performance of government debt, as well as the dollar. To address this, we remain anchored to shorter dated bonds and are steering away from the greenback.  Additionally, in September, we added to our ‘debt diversifiers’: gold and emerging market bonds. Gold offers valuable downside protection while emerging market governments are showing spending restraint and their bonds are providing really attractive levels of income.

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