The past two weeks have served up a smorgasbord of challenges for multi-asset managers with the Budget, US election, interest rate cuts and another round of stimulus in China all happening in quick succession. David Coombs, head of multi-asset investments at Rathbones, has reacted by selling gold, trading government bonds around the Budget and US election, and remaining overweight US equities but taking some profits.
Rathbones sold down its exposure to US treasuries late summer and through the autumn and reduced duration, so ahead of the presidential election, Coombs’ funds only had 2-3% in treasuries.
He switched into government bonds from Portugal, Romania and Germany, hedged back to sterling. He already owned Australian debt but added government bonds issued by New Zealand.
After last week’s election, US treasury yields picked up a long way, so Coombs moved some money back into US treasuries at a higher yield.
The UK Budget involved a similar playbook to the US election: sell gilts before the Budget; buy them afterwards. He invested in 30-year gilts last week at yields above 5%, meaning that real yields after inflation are 2.5%, which he believes is a reasonable entry point.
Coombs has halved the gold exposure in Rathbones’ lowest risk multi-asset portfolio and sold out of gold completely in all his other portfolios. If bond issuance increases and the US Federal Reserve keeps rates higher for longer, then gold (which doesn’t have an income) would look less attractive, he said.
The gold price has risen by some 40% year to date so he has taken profits and raised cash. He expects volatility to increase so wants to have plenty of cash going into the end of this year to take advantage of opportunities as they arise.
The multi-asset team has also raised cash by selling UK corporate bonds, especially high-yield, because spreads are tight.
Rathbones has been increasing its US equity exposure throughout this year despite valuations looking punchy. Last week's US equity rally provided the opportunity to take profits from some strong performers such as Morgan Stanley, as banks’ share prices rose in anticipation of deregulation.
Overweighting US equities at the expense of Europe and the UK is an obvious trade, Coombs said. Trump’s agenda of deregulation, putting America first and ‘make America great again’ should support US equities. “I wouldn’t be rushing into Mexico or Canada,” he said.
Meanwhile, tariffs and increasing regulation are headwinds for the UK and Europe.
Coombs has tasked an equity analyst with going through the portfolio line by line to ascertain if any holdings are exposed to China through their supply chains and to estimate what the impact of tariffs might be. He does not think the portfolio has significant exposure to China but wants to double check.
The challenge with trying to anticipate what measures Trump will enact once in power is separating his colourful rhetoric from the logical themes underpinning his dialogue, he continued.
“We need to see what Trump actually does rather than what he says, that’s the key always with Trump. We don’t get carried away with the hyperbole, we wait to see. He always threatens high and settles low,” Coombs explained.
In practice, tariffs may not be as high as Trump has intimated, he said.
A Trump-led White House could also have far-reaching consequences for global geopolitics. The war in Ukraine could conceivably end within six months, which Coombs believes would be in both Ukraine and Russia’s best interests. “They both need an off ramp and Trump might just be the excuse,” he suggested.
Coombs is reviewing what impact an end to the Ukraine conflict could have on commodity prices, especially the oil price. Would sanctions on Russian oil and gas be lifted as part of a peace settlement? he asked.
He also wonders whether Trump will put pressure on Israel to deescalate the conflict in the Middle East and whether the US might levy sanctions on Iran.
Finally, in the sustainable investment strategies that Coombs manages, he sold several stocks before the election that are dependent on government subsidies and could be vulnerable if Trump won. “Anything where we thought, you need the support of a government act, we just don’t want to be anywhere near right now,” he said.
Coombs does not think Trump will repeal the Inflation Reduction Act, however, because a lot of the infrastructure spending that stems from it benefits Republican states.