In September’s quarterly rebalance, Quilter’s Wealthselect managed portfolio service reduced its equity exposure in favour of a heavier weighting to fixed income due to uncertain economic conditions in the UK following chancellor Kwasi Kwarteng’s mini budget.
Portfolio manager Stuart Clark also reduced allocation to gilts in favour of actively managed global sovereign bond exposure.
The move echoes Clark’s view that uncertain times are ahead in gilts market, due to sterling weakness; higher UK inflation; the Bank of England’s timid interest rate increase in comparison to the Federal Reserve; and potential for further fiscal policy change.
Clark said: “We continue our cautious stance. With ongoing inflationary pressures, central banks remain on a hawkish path and the cost-of-living crisis increasingly puts pressure on consumers and corporates, increasing recessionary risk, and while there are headwinds for fixed income from rate rises, yields look more attractive today than previously, and should provide support in a recessionary environment.”
Following last week’s mini budget, Clark anticipates further deterioration for UK equities, while the government’s recent moves are expected to lead to greater BoE tightening, increasing the chances of a recession.
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Speaking about the government’s recent actions, Clark said: “Last week’s fiscal event is a huge gamble, and it will have far reaching consequences if it doesn’t come off, and given the potential lag between tax cuts and any trickling down effect, it is unlikely to address the immediacy of the current crisis affecting the population.
“Adding to risk assets at this point seems highly speculative and not much else. If we hope for the best, this could be a game-changing pivot for the UK, but – and it is a big ‘but’ – if we fear for the worst, we may find further comparisons being made with 1970s’ IMF bailouts.”
He added: “The UK is facing a unique set of circumstances and the fact it is cheap relative to other areas of the market means very little while this kind of uncertainty persists.”