McQuaker believes the source of this decline, and subsequently his “profoundly negative” view on emerging markets, is an overdependence on commodities. “Emerging markets have been difficult for some time as a result of a sharp fall in commodity prices,” he says. “Russia and Brazil are both now in recession.”
However, McQuaker predicts the effects of the commodity crash could effect markets globally, and have yet to show their full implication. For example, the slowing down of China’s stock market may seem to be under control but McQuaker says the country’s overdependence on its – usually – reliable authorities means the effects of its over-reliance on commodities will hit hard.
Similarly, he feels that wariness around commodities could lead the US Fed to hold up any fiscal tightening until 2016 due to fears of global growth slowing too much, which he says would be good for bond markets.
“As a result of this, we have put a bit of bond exposure back into the portfolio in the short term,” he says.
Despite his negativity he admits he has taken some money out of a thriving Europe and put it into the ailing emerging markets due to the two sectors opposite nature.
“When investors are completely disenchanted with something and can’t see any reason to buy it, it is a good time to at least look at it and see if people are being a little too pessimistic, especially when it is cheaper.”
Weighting game
Alongside Asia and emerging markets, McQuaker sees his equity portfolio as having two other parts, which he remains long on compared with his competitors: the UK and US; and Europe and Japan.
“The US and UK have quite similar economic backdrops and are getting to the point where they will have to change the direction of monetary policy due to high growth rates, so they are in good shape but are not particularly helpful,” he says.
“Europe and Japan are very different but they are both dedicated to full stimulation through quantitative easing. The authorities are working really hard to generate more growth, which is a good backdrop for investment, so we are more positive on both.”
Alongside this, he is underweight bonds, particularly government and investment grade, and favours mid-risk assets such as high yield and UK commercial property.
McQuaker is also more heavily reliant on cash than the average portfolio due to “ripe” conditions for rising volatility, where he believes levels have been quietly growing since the mid-2014.
“The risk scenarios if volatility picks up revolve around US monetary policy and could see us moving into the first rate-hiking cycle in a decade and, no matter how effectively this is done, rates will rise and liquidity will be less plentiful,” he says.
“If you have cash and prices fall then you are prepared and volatility is not always the enemy – as long as it is temporary and not too severe.”
McQuaker says some events that effect the investment world cannot be predicted, such as natural disasters or other unexpected extremes, but he remains confident that whatever happens, his investment jigsaw will not be taken apart easily.
