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Why we’ve made changes to our asset allocation

20 June 2018

Henna Hemnani, assistant fund manager for the Miton’s multi-asset fund range, explains why the managers have made changes to their regional asset allocation.

The story of 2017 was strong and synchronised global growth, and almost all equity markets made good returns over the period. This year, however, the behaviour of economies seems much less uniform.

We’re seeing a shift in global economic growth leadership towards the US, away from the synchronised scenario. The chart below shows the Purchasing Managers Index (PMI), an indicator of economic health, for the US and for the world (including the US). From the beginning of this year you can see a divergence in the data, with the global PMI falling, albeit still at very healthy levels, but the US PMI continuing to rise.

Manufacturing PMIs

Source: Bloomberg, 30/06/2015 – 31/05/2018.

US economic strength is further supported by the planned tax cuts. In this environment we would expect US equities to benefit,  we have therefore increased our US equity exposure. We would also expect the US dollar to be a beneficiary, and this has repercussions for the emerging markets that have a material amount of their debt denominated in US dollars, because the cost of their debt rises as the US dollar rises. We’re comfortable with our exposure to the emerging market countries that are less sensitive to these global factors, like China, but have been reducing emerging markets that are more vulnerable here, like Latin America.

Shift to UK

We’ve also made a significant asset allocation shift towards the UK. We try to avoid many cognitive biases, such as having a permanent home bias, and have therefore been fairly light in the UK for some time because of ongoing political and economic uncertainty around Brexit negotiations.

However, we’ve been adding to the UK this year on positive price momentum and have more or less doubled our UK equity weight. Sterling has been weakening and the UK market is biased towards overseas earners and is therefore a big beneficiary of a weaker currency. If this trend continues, it could trigger a dramatic asset allocation shift towards the UK.

The opportunity becomes even more attractive when you consider how much the UK has lagged global equity markets since June 2016.

To consistently deliver on our outcomes, we have to be pragmatic and change our positions when the data changes, hence the recent changes to our regional asset allocation. Our sectoral asset allocation is broadly unchanged, as the absolute level of global PMIs remains high and in this risk on environment we still expect risk assets, specifically cyclical equities, to outperform.


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