So where do we go from here?

So where do we go from here?  It’s a good question and one that has many investors scratching their heads.  On the one hand, we have no really bad news.  On the other, there is an increasingly distinct trend of weakening economic and corporate earnings data.  To those who have seen cycles come and go, the phrase ‘twas ever thus’ springs to mind.  The sharp falls at the end of last year, and the subsequent and equally sharp recovery hardly came as a surprise.  We have warned of the likelihood of sharp fluctuations for some time now and remain of the view there are more to come.

Which brings us back to the questions of where do we go and what do we do.  Well one thing is for sure, trying to market time swings in sentiment would be foolhardy in the extreme.  In markets that are reacting to such short term sentiment, getting whip-sawed would be all too easy.  Equally, sitting like a rabbit in the headlights is hardly an enlightened investment strategy.  So it’s back to basics.

For us, the basics mean looking carefully at where our clients are most at risk and what we can best do to protect them.  At this phase of the cycle, one area we have been progressively reducing our exposure to, is smaller companies.  In the boom years, when the economy is expanding and swashbuckling stock markets are flying, smaller companies offer potentially exciting returns.  But, when the economy gets tough, they can also see much sharper pull backs.

We have already reduced our smaller companies’ positions in the US, Asia and the UK.  Now it’s the turn of Europe.  Amid some pretty grim macro data from the area as a whole, and Germany in particular, we are closing our long held smaller companies’ position.  We are not, though, reducing our overall equity weighting.  Instead, we are shifting the allocation to larger, robust brands and companies we feel are better able to withstand a downturn.  This allows us to participate in any further equity upside but continues our longer term theme of de-risking as the end of the cycle draws ever nearer.

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