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Time to move risk back on the table?


Investors should be topping up on risk within portfolios as the current downturn cycle comes to a close and markets shift into a ‘stability’ phase, according to the multi-asset team at River and Mercantile Group.

Tamsin Evans, head of the multi-asset team at River and Mercantile Group which runs the Dynamic Asset Allocation fund, says they have been reducing underweight positions to specific equity markets and moving up the risk spectrum on the view markets will see an uptick towards the end of this year.

She said: “While we still consider this the downturn phase, things are a lot more stable now than they have been, and we’ve seen equities in most markets move from expensive to fair value, and even cheap in some areas.”

Equity markets have been in a downward spiral since ‘Red October’ where a combination of fears on Brexit, US-China trade wars and tightening monetary policy prompted investors to move risk-off.

On a six-month view, the FTSE 100, S&P 500 and MSCI World are all in negative territory, with the indices posting losses of around 3.5%. Emerging markets (EMs) have also suffered during this period of heightened volatility.

However, Evans said many key indicators are now flagging buy signals. “After the heavy falls of December, equity and credit markets staged a partial recovery,” she said.

According to Evans, the resurgence had actually begun near the end of the previous month, and there was a general feeling that December’s sell-off had been too sharp.

“This was a view that we shared, especially in relation to US small- and mid-cap stocks, European stocks, and emerging market stocks,” she explains. “We are seeing the early signs of recovery in many markets, and now some of the forward-looking PMI indicators we follow are also screening positively. Overall, it means markets are now pointing to an upturn in the next six to 12 months.”

As a result, the team has increased its allocation to risk, moving from materially underweight to closer to neutral. Equity and credit positions have both been increased, while within equities there has been a focus on smaller companies:

“How we are playing this is to move down the cap size in equities, particularly in the US where there are opportunities now, as well as EMs. We are still underweight EMs but we are increasing our exposure. We are essentially on the cusp of what we call the ‘stability’ phase, and our main equity trades are now focused on emerging markets and developed Asia.”

Meanwhile in credit, having been significantly underweight throughout 2018, River and Mercantile has increased both high yield and emerging market hard debt since the start of the year, with a particular preference for high yield given the increase in spreads witnessed over December.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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