In the past, political risk was largely the domain of the emerging economies that would have short-term effects on markets that investment managers might exploit for some tactical repositioning, Husselbee said.
“The country seems to have become very insular in its thinking. A Brit exit is not the be-all-and-end-all and certainly that view shouldn’t be reflected in clients’ portfolios. There is another 90% of the world out there to consider.”
Now, however, he sees current political rhetoric as pointing towards protectionism, which he calls “game-changers”.
Most of today’s investment management industry is working in an environment where globalisation is key and the rising middle classes and emerging market economies have all benefited.
If the populist vote succeeds – as Husselbee feels like it might – and the world’s largest economy starts to renegotiate its trade deals with China and start to refocus its manufacturing domestically, some real threats are appearing.
With central bank activity keeping rates so low, and inflation still low but set to move upwards as the oil price recovers, Husselbee, who is head of multi-asset at Liontrust, said he was “reluctantly” tilted towards risk assets but recognised that valuations were elevated.
“We are reluctantly in capital appreciation mode and reluctantly favouring equities right now.
“If bonds were a standalone asset class – and we didn’t take a diversification approach – we would find them to be the most expensive asset class we have ever invested in. I would be very fearful of that.”
Diversification benefits
He reminds clients of the benefits of diversification and that by its very nature not all assets will rise together.
“Moving to a zero weight in bonds is very high conviction but then you miss out on the downside protection offered by bonds – albeit for a very expensive price.”
He remained committed to the basics of investing – buying assets low and selling them a bit higher while trying to avoid overpaying excessively.
“If you want safe haven, diversification, downside protection, risk off trade – there is no substitute for government bonds, or the dollar, or even the Japanese yen – but these are all expensive.”
Such trades then become crowded and we see more momentum-led rallies of overpriced assets.
“However if you want diversification you just need to figure out where you’re going to find it and the price you are willing to pay?”
