Albemarle Street Partners is looking to reduce portfolio-wide exposure to the riskiest asset classes as it attempts to “navigate the maze of multi-asset correction”.
Fahad Hassan, chief investment officer at Albemarle, said recent comments made by Federal Reserve chairman Jerome Powell suggest that the rally in equity markets following better inflation and economic data has now run its course.
In Powell’s speech, the Fed chair said the central bank has an “unconditional” and unwavering commitment to bring down inflation, while despite recent improvements in inflationary data he stated it still “falls far short” of a turn in trends.
Hassan said while there was nothing surprising in Powell’s speech, which also stated the Fed will be patient in unwinding tighter policy when the economy slows, he added it “provided ammunition for the bears to re-exert influence”.
“With a slew of economic data due to be reported in the next few days, investors will try to interpret the likelihood of another 75 basis-point rate hike in September,” he said. “The August inflation print has added importance as it could impact the pace of Fed policy and asset prices for the rest of the year.”
Energy crisis
Meanwhile closer to home, Hassan added the news looks “far worse”, with inflation gaining more momentum in recent weeks owing to spiralling natural gas prices and the lifting of energy price caps.
“UK and European energy infrastructure is ill equipped to deal with the consequences of the war in Ukraine,” he said. “Electricity prices are linked to the price of natural gas, which during the winter months leads to an escalation in energy costs for households and businesses.”
Hassan argued the near doubling of energy bills will push millions into poverty and drive-up wage demands across the economy. The Bank of England expects UK inflation to peak at 13% in the fourth quarter, but private sector forecasts have been revised much higher.”
“The immediate impact of political dithering has been felt in currency and fixed income markets, where UK gilts have performed far worse than global bonds and sterling is close to its post-pandemic lows versus the US dollar,” he added. “The lack of a clear plan this close to winter adds fuel to an already precarious backdrop.”
Set against this backdrop, Hassan said “the mind naturally focuses on areas that have had the largest historical drawdowns”. These, he added, have included UK large caps, UK mid caps, UK property and Asian equities.
“Note that many of these declines were seen during the 2008 global financial crisis,” he said. “The drawdown characteristics of fixed income are notably different from equities, and we can take advantage of this characteristic as we aim to enhance longer-term portfolio outcomes.
“We remain on a defensive footing and will continue to reduce portfolio-wide exposures to the riskiest asset classes.”
