Asset Allocator recently escaped from the the autumnal rain for long enough to catch-up with Ben Gutteridge, head of the model portfolio service at Invesco.
His, and our, time away may have been disturbed by the sharp market gyrations at the start of August, as a combination of jitters about the US economy, the fate of technology company earnings, the unwinding of the yen carry trade and thin trading brought a sell off of rapid, if actually quite moderate proportions relative to history.
Gutteridge says that while the economic data may point towards a slowdown in the US, and increase caution among investors, “I am not ready to go overtly defensive just yet.”
The principle data point on which Gutteridge spoke was US unemployment data, which he said showed a deterioration.
And while that would normally point to a sharp deterioration in economic conditions, Gutteridge says one of the factors causing the US unemployment rate to rise is an increase in the supply of workers, that is, of people entering the labour force, rather than a reduction in the level of demand for jobs, and in his view it is only if the latter were to happen that there would be a serious issue.
But he believes the newsflow is such that the thoughts of many consumers will soon turn towards recession, and this increase in risk off sentiment will have an impact on markets.
It is an impact he expects will lead to an increase in demand for fixed income assets, with bond and equity correlations being restored.
Stephen Jones, chief investment officer at Aegon Asset Management, is another who is relatively relaxed about the economic data in the US.
His view is that slightly higher unemployment was not merely to be expected, but also that policy makers in the US needed it to happen to curtail inflation.
But when it comes to asset allocation from here, he feels shorter-dated bonds have the greater capacity to dampen volatility in the current market conditions than do longer dated bonds.
He feels the yield available from shorter-dated means there is limited capacity for price drops there, whereas he feels the supply and demand dynamics for long dated government bonds means those could prove to be more volatile than is usually the case, as government deficits are already high, and would be expected to go higher still if economies deteriorate, requiring the issuance of more bonds, potentially having a negative impact on the price.
