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Asset allocation: Rathbones’ David Coombs on why euro QE is four years too late

The European Central Bank’s decision to finally kickstart a quantitative easing strategy has in turn spurred much elation with many fund managers upping their allocation to the embattled region.

The Bank’s €60bn-a-month bond buying programme has raised hopes that not only will the initiative help repair the currency bloc’s economy but that it will push eurozone markets on to echo the gains the US and the UK enjoyed on the back of their respective QE injections over recent years.

However Rathbone Unit Trust Management’s head of multi-asset David Coombs is sitting this party out. He believes QE has ultimately come too late and he is not convinced it is the silver bullet that many think it is.

Coombs cites the case of Japan, which although currently reforming, has been using QE on and off for the past two decades – to arguably little effect.

He says: “The euphoria is frankly naïve. I am not quite sure what it is going to achieve. Interest rates in Europe are finally near zero and then the ECB brings in QE.

“It has arrived too late, it was needed four years ago. The bull case is that it feeds into asset prices but I feel that trade has already played out.” 

Others have echoed Coombs’ concerns, given that while the typical IA listed Europe ex-UK fund lost 1 per cent during 2014, over the past five years to 31 March the sector has produced a substantial average return of 45 per cent.

The manager’s flagship fund, the £95m Rathbone Strategic Growth fund, which has returned 64 per cent since its June 2009 launch, is unsurprisingly underweight the region “based on serious structural issues”. It has a mere 3.6 per cent invested – and the level is unlikely to rise any time soon.

“I expect over the coming months we will probably cut back that allocation further. I think analyst forecasts for eurozone earnings growth are fairly punchy and there is a great risk they will undershoot expectations,” adds Coombs.

In contrast, Coombs has a more decent slug of money, at 18.6 per cent, invested in the UK. But this does not mean he is giving it a massive vote of confidence – as he is still bearish towards his domestic market, primarily as a result of the upcoming political battle in May.

From a UK investment perspective, Coombs believes it is “the most important general election since the 1980s”.

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“I am very concerned about sterling in the run up to May’s general election and even more so in regards to what will happen after,” he adds.

Looking at two of the much-documented possible outcomes, he notes that if there is a Labour minority propped up by the SNP, then the UK has to deal with the issues of having a separatist party holding sway in Parliament, which he says “would be a major concern for international investors”.

On the other hand, Coombs highlights that if there is a Conservative minority supported by UKIP, Britain will then have to contend with a referendum on its place within the European Union – a situation that comes with a significant amount of uncertainty.

While many asset allocators have cooled on the US over the past year, primarily as a result of valuation concerns, the world’s largest economy remains Coombs favourite market, where his strategic growth vehicle has some 17.8 per cent invested.

“On a long-term strategic basis my bias is quite sector driven, where I like technology, biotechnology and healthcare. Looking more short term, the economy is the fastest growing in the developed world and the domestic earners in the States should do well.”

In regard to worries over valuations, given the recent highs enjoyed by the US market, Coombs acknowledges that the market does not look “particularly cheap” but he urges that on a relative forward-looking basis, neither does he think it is massively overvalued, “especially in comparison to Europe”.

“I believe analyst forecasts for the US are quite modest,” he adds.

Japan represents another of the fund manager’s favoured plays right now, and in only the past month he has doubled his portfolio’s exposure to the region, which now stands at 5 per cent. Coombs is quick to highlight that this is not as a result of the country’s own QE programme. “We are seeing better corporate governance and shareholder value coming through. Japan has some great stocks but it is an alpha, as opposed to beta, play.”

Like many of his peers, he believes the fixed income universe offers “very little value” right now and that in the main, exposure is acquired via US treasuries, credit positions and investment grade bonds. He has no investments in emerging market debt, which is indicative of his sentiment to the region in general. 

“I am just very concerned about the slowdown in demand for commodities, the impact on currencies and rising deficits, especially in countries like Brazil and Japan,” Coombs says.

From an equity point of view, emerging markets and Asia remain big underweights for Coombs, with respective allocations of 1.5 per cent and 3.4 per cent. He says while he believes the recent hype around India is warranted there are broader worries that developing world economies have to face; namely a strong greenback and the prospect of interest rate rises, neither of which bode well for the region.

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