“Post-Brexit we had a relatively big asset allocation change,” admitted Lloyd, who serves as chief investment officer at Murray. Over the summer, the asset allocation team at Murray decided to reduce exposure to both the UK and Europe to protect against the UK’s potentially prolonged and messy break from the European Union.
Even if there is a relatively smooth and successful Brexit negotiation, Europe will remain mired in deflation, said Lloyd, so it could be just a matter of time before another EU country, like Italy, decides to cut its losses and get out too.
“When Italy joined the euro, they had the same sized economy as the UK, in fact, I think it was slightly bigger,” Lloyd said. “And since then, Italy hasn’t grown at all. How long will it be before Italy or someone really key to the European project decides they would be better off outside?”
And the multitude of upcoming European elections present more unknowns, which make investing in the region seem like a still riskier endeavour, in Lloyds view. “If the French electorate decide to pull a Nigel Farage and elect Marine Le Pen, she is going to have a referendum. And polls have showed that the French populous is even less enamoured with the EU than the UK populous.”
“Although Europe is cheap,” said Lloyd, “we feel the risks for the region have gone up too much.” Still, Lloyd said he is not “overly negative on the market currently” so has kept his cash levels very low.
“What we witnessed in ‘08 was a once in a generation decline,” said Lloyd. “I think everyone is trying to call the next big downward swing to compensate for the global crisis in 2008 since so few people did spot it. This means that most issues are being sniffed out and highlighted, and if they’re out there, they’re known information so they don’t have that shock factor.
“There are so many people that are negative, there is so much cash around and people who hate this bull market. But meanwhile, you have Europe, the UK, Japan and, to some extent, China printing money so there is liquidity coming into the market and it’s keeping it propped up. That is where some returns are available and the global economy is gradually recovering,” Lloyd added.
The time to worry is when the global economy has recovered sufficiently and the quantitative easing turns off, he explained. “Europe might be unthinkingly trapping itself in the situation Japan finds itself in.”
For Charlotte Square IM owner and head of investment Forsythe, the UK economy still presents opportunities, particularly in the British-based overseas earning FTSE companies, which he has increased his weighting toward. He has also taken to increasing emerging markets weightings, mostly in Asia and has had a “small nibble at inflation linked bonds.”