In this short video, James Klempster discusses the drivers of the volatility in markets and the performance of Multi-Asset funds and portfolios, whether we are seeing a rotation in markets, and the changes in asset allocation that the team has made recently.
Simon [00:00:03] Welcome to the latest Multi-Asset review of markets. I'm Simon Hildrey, and with me is James Klempster. James, we've seen an increase in volatility recently in markets, particularly from the US. Can you tell us what's driving this?
James [00:00:19] Well there's a lot going on Simon, at the moment. I think at its heart, it's a bit trite, but market participants don't like uncertainty. And what we've seen over the course of the last few months, particularly in the political sphere or a geopolitical sphere, is a cause of some pretty significant uncertainty, whether it be redrawing of long-standing political allyships, whether it would be the introduction of tariffs and then tit-for-tat retaliation. You can imagine if you're trying to run a business, how hard it is to plan through these sorts of challenges. And as investors trying to put a value on those businesses, you can understand why they're nervous too, and that's manifesting itself through volatility today.
Simon [00:01:05] And how has that affected the performance of your Funds and portfolios?
James [00:01:09 As you've already said, the epicentre of the challenges at the moment is the Us stock market, and that's the market we have less allocation to compared to quite a few people out there. We think that the US is fairly expensively valued, particularly that cohort of 'Mega Cap' tech names sat at the top of it. And as a result of that, we think there's better investment opportunities in terms your sort of risk and return combination in markets outside of the US. So we've got a sort of a neutral to slight underweight in the US and so while the US is selling off and actually providing negative returns year-to-date, it's the first time in quite some time it's underperformed the rest of the world by such a margin. We've been well positioned elsewhere in equity markets and also having diversifying assets in credit markets and in the bond markets to provide some ballast in this more challenging time.
Simon [00:02:05] So are some of the unloved markets and asset classes there having a bit more time in the sun if you like?
James [00:02:12] Absolutely. Yeah, I mean, the best performing market year-to-date is the European stock market and within that, really Germany sort of leading the charge, very firmly in the in the teens year-to-date. Then the UK, which is a market we've been positive on for quite some time, we've seen that up in sort of very solid single digits as well year- to-date. I don't know whether the word rotation is right yet. We'll only really be able to judge that with the benefit of hindsight, but certainly the darling of the market over the last decade or so, the US, regardless of what challenges have been thrown at it or thrown at us, the answer has ended up being the US stock market. Over this relatively short time period, the unloved markets have really started coming to the fore.
Simon [00:02:58] So is it too early to assess that Trump is aking Europe great again?
James [00:03:06] MEGA. What it has done clearly is create an impetus to focus again on European markets, focus on what they have in them, and the need perhaps for Europe, which has been I think it's fair to say, quite careful with fiscal policy, for example. It looks as though they're going to have to be more expansionary, relax some of those fiscal challenges, and move into a phase that may well see them sort of getting an economic boost and that feeding through into the stock market as well, which is what we're seeing in terms of market returns.
Simon [00:03:36] And just finally, have you made any changes to tactical asset allocation or to the underlying vehicles?James [00:03:44] Nothing major over this quarter. We've just had our tactical assets allocation round, which we do quarterly. The two main tweaks were in investment grade credit, which we had scored at 4 out of 5. So a positive position in investment grade credit. It's been a very beneficial one to us. We've made decent returns out of that. We've now just moved that down to neutral. We remain overweight high yield within fixed income. We have that as a 4 out 5. So. As a yield play, it's very attractive to us. You're getting a spread of 300 basis points plus on top government bonds which are yielding you 4 or even more than 4%. The total yield there is very attractive. So when you think about the fixed income basket in the portfolio, we've taken some profit from the higher quality part in investment grade and we're allowing the lower quality piece, the high yield, to continue in a score of 4 out of 5.
Simon [00:04:39] Any changes to equities?
James [00:04:41] We've actually been fairly static on the equity allocation. We remain broadly optimistic on equity markets generally. We score them overall in a 4 out of 5. Within that, we have the US scoring neutrally at a 3 out of 5, but US smaller companies we score at a 4 of 5. UK small companies and large cap we have as a 4 out of 5. Europe we're more cautious around, despite obviously doing very well year-to-date. We have Europe large cap scoring at a 2 out of 5 there, so we're slightly underweight, but we still are more constructive on European smaller companies. Then Japan, we have Japan as a 4 out of 5. Asia, ex-Japan, and emerging markets, we also have as a 4 out of a 5. So broadly constructive, more concern around the US and then a little bit more concern around Europe. But overall, we are quite positive on the equity picture today.
Simon [00:05:33] Great. Thank you, James, and thank you for watching. We'll see you next time.
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