This comes after the government’s statement that it is not looking for a Swiss-type deal, and will steam ahead towards the deletion of 4,000 EU laws from UK statute books.
The narrative suggests bond vigilantes attacked Kwasi Kwarteng’s expansive Budget. However, as long as external bond market conditions remain precarious, the UK bond market is still in peril.
The very notion of Brexit could find itself at the centre of fresh market turbulence, leaving Sunak’s government with very few options. It has already capitulated to market demands, tightening fiscal policy.
If markets attack Brexit, how could the government for which the notion is a raison d'etre possibly react?
What investors and managers need to do
Our job number one is to acknowledge risks. We have unwaveringly done so and have been keen to share our concerns with clients.
The question is what can portfolio managers and investors do in this environment, especially when diversification has not worked this year?
Seasoned asset managers are planning ahead, keeping market ‘bets’ to a minimum, either by holding cash or by being ‘neutral’ in their asset allocation, which we have been doing since our last September meeting.
Also, we have managed to steer clear of areas where the downside has been significant.
From any exposure to new-age assets such as cryptocurrencies (which seemed to be getting a lot of attention eighteen months ago), to illiquid securities and funds, such as real estate, we have made sure our investment offering is liquid, transparent and of high quality.
Meanwhile, we need to acknowledge upside risks as well as downside risks. Over-protecting a portfolio, or reverting to cash, could risk missing the market rebound, causing lacklustre returns for years to come.
It is exactly because of the higher probability of further financial distress that we believe the pivot could come sooner rather than later. Thus we are making plans to ensure we do not lose out when and if the pivot comes.
The very high level of cash suggests institutional investors are also waiting on the sidelines for precisely an abrupt US policy reversal.
Investment managers should not fail to acknowledge the lack of visibility in a very bad environment. Instead, they should be open about it, and protect what can be protected. Hence, our ‘neutral position’.
George Lagarias is chief economist at Mazars
