Rathbones’ David Coombs: “UK starting to look like the grown-up in the room”

by | Nov 2, 2022

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Written by David Coombs, manager of the Rathbone Multi-Asset Portfolios

Now that Rishi Sunak is PM, there’s a strong possibility that the Bank of England will not raise rates so aggressively. Add to this the plummeting wholesale gas prices and, weirdly, the UK could end up looking like the grown up in the room, economically speaking.

There have been many questions over the past month over the stability of the UK, however we believe that neither Rishi Sunak nor Keir Starmer will scare the markets, so arguably the UK looks like it has the greatest political stability since Corbyn was elevated to leader of the Labour party. When one looks at the possible reappearance of Donald Trump, ongoing concerns around President Biden’s health and the breakdown in relations between Germany and France, the UK doesn’t look like such an outlier. We concede that Brexit is still a thing, though!

But let’s not get too carried away – if the Bank does raise rates aggressively alongside spending cuts, then the likely recession could be deeper and longer; the spectre of policy error risk remains. We are not rushing into domestic UK equities yet in our core multi-asset portfolios as we tend toward large-cap stocks. But we think the mid-cap space does look more interesting if you can look through the next few months.

The serious point here is that the UK bond market could look very attractive from here. After the mini budget we bought gilts along the curve up to 30 years and added significantly to investment grade and high-yield Sterling denominated bonds. We have taken some profits from the gilt moves since Jeremy Hunt became Chancellor, and again after Rishi Sunak’s appointment. Our hedge of the US Dollar is now protecting us against the Sterling recovery.

Our view remains unchanged that the US Federal Reserve will pause its tightening earlier than the market is discounting, and this could have a huge impact on volatility as leveraged positions are forced to unwind after such a long period of upward momentum.

So, in summary – we feel more confident in light of the recent data that indicates sentiment could swing to be more positive for risk assets. Other than the cash from sales of gilts we are fully invested with the highest exposure to credit for a decade. We are also fully weighted in equities having been adding all year. We still take profits when profits are there, to maintain our risk exposures.

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