Donald Trump’s campaign for the White House is a greater risk to markets than the threat of the UK leaving the European Union, says Richard Woolnough, manager of the M&G Optimal Income fund.
The fixed income manager says while Brexit will create “noise and uncertainty”, the real worry for this year is the US presidential election.
He says: “Although Brexit fears are likely to cause volatility, a far more important political issue is the US election: investors should be less concerned with the EU referendum and focus more on the possibility of Donald Trump as US president.”
Woolnough, whose Optimal Income fund has faced headwinds recently and saw £8bn of outflows last year, also urges the Bank of England to increase interest rates.
He says: “The Bank of England needs to gradually tighten monetary policy because momentum in the labour market means that even if rates go up in the near term the unemployment rate will continue to fall, creating wage pressure and higher inflation.
“The UK economy faces record low unemployment with no headwinds, a windfall gain from oil, weak sterling and a buoyant housing market. It seems complacent to not raise rates.”
Looking to areas of opportunity, Woolnough says the market is overly pessimistic on bond default rates, meaning there are higher returns to be made. He adds that it’s the same case for high yield, which now makes up a third of the fund, up from a 25 per cent allocation last year.
“In the UK for instance, the level of BBB bond spreads implies around a 4 per cent annual default rate, which is way in excess of the historical average of around 0.4 per cent.
“So the market has become overly pessimistic and we are therefore happy to take credit risk in the fund, given the high level of compensation on offer.”