Odds are shortening on Britain leaving the eurozone. If it happens, short-term market and currency falls look inevitable. Many clients are likely to be heavily weighted towards UK equities, so is now a good time to talk about increasing global exposure?
A decline in sterling would give returns an extra boost when brought back into pounds. Clients that have been wavering between topping up existing UK funds or even keeping their money in cash may like the idea of bringing a little Brexit insurance to their portfolios. Once you have got clients’ interest, however, the global equities arena is massive and can be played in lots of different ways.
Is the US yesterday’s news?
The US dominates the IA Global sector. The country comprises roughly 60 per cent of its benchmark MSCI World index and around half of its 260 funds invest more than 50 per cent in that market. And they have had a good run. The S&P 500 is up 200 per cent since it hit its 2009 financial crisis low.
However, the tide may be turning. Election uncertainty is distracting and not all the US’s latest economic data has lived up to expectations. Fund managers are starting to react. At end of February, Rathbone Global Opportunities fund manager James Thomson, for example, cut his US exposure to closer to the 44 per cent from over 50 per cent at the end of 2015.
A quick look at how the other major global markets have been performing shows a mixed bag. Japan has had a decent past month but a pretty shocking start to the year. We are still broadly positive on Japanese equities but a lot of the fund managers we meet say the jury’s out. Abe’s government has been forced into negative interest rate territory and his much-heralded economic reforms may be running out of steam.
Meanwhile, prospects in the eurozone are uncertain. Increased stimulus from the central bank should be good news for equities but bear in mind a Brexit would have a destabilising impact across the channel too.
A fund like the Elite rated Baillie Gifford Global Discovery could be an interesting play. Unlike many others in the sector, it has a focus on small caps and growth, which means its companies can exploit niche markets and may be less affected by the macro trends.
There are also several specialist funds sitting within the Global sector. Another option for clients looking to protect their portfolios against a possible broad market fall could be a few satellite investments.
During a volatile start to 2016, infrastructure has yet again proved itself to be a good defensive investment. The Elite rated First State Global Listed Infrastructure is up 11 per cent year-to date, making it the second-best performer in the wider sector. Its stable yield and low beta make it well suited to our current environment.
Energy is another area that has seen its fortunes start to reverse. I cannot predict whether we have hit rock bottom with commodity prices but, based on trends so far this year, investors are taking a positive view. Funds such as Guinness Global Energy fall within the Global sector and can give clients access to that upside while also diversifying outside of purely British holdings.
While year-to-date is a very short period of time, it does suggest there could be a payoff this year by looking outside the box of what has been doing well in the past few years.
Developed versus emerging
Another area that may be worth a look right now, especially when valuations are considered, is emerging markets. Funds in the Global sector mainly consider developed economies, so more adventurous clients might need to explore the Global Emerging Markets sector.
It is worth noting emerging markets have been “cheap” for some time and many remain below long-term trading averages. This has helped boost their returns year-to-date. Total returns in sterling from the MSCI Emerging Markets index are up 4.9 per cent; the MSCI World less than 1 per cent. When we look back on 2016, they may well turn out to be one of the best performers.
Of course, emerging markets come with a whole different set of risks and opportunities, and after a rocky few years I would certainly advocate a cautious approach.
Darius McDermott is managing director at FundCalibre