PA ANALYSIS: Is it time to run for safety, or has that horse bolted?

With 10-year gilt yields falling below 1% for the first time in history, the yen trading below 100 to the dollar and gold at $1,325 per ounce, it is clear investors are running for safety.

PA ANALYSIS: Is it time to run for safety, or has that horse bolted?

And, such a move is understandable given the chaos that has been unleashed by the outcome of Friday’s vote by the British people to leave the EU.

As, Societe Generale’s Kit Juckes summed it up: “The extent of the uncertainty that now clouds the UK’s economic and political outlook is hard to exaggerate. The Government is in limbo ahead of a Conservative Party leadership contest. The opposition is in chaos. The rest of the EU would like negotiations on the UK’s exit to begin but they have no-one to negotiate with.”

If one looks at the fund flow statistics, it is clear that investors have been weatherproofing portfolios in the run up to the vote. According to Funds Network, which put out its figures for May, the Corporate Bond, UK Money Market and Short Term Money Market sectors dominated the sales chart over the month.

And, it said, “This flight to safety was also evident in the overall fund sales in May, which saw fixed income funds such as the AXA Short Credit Short Duration Fund and the Baillie Gifford Investment Grade Long Bond Fund top the bestsellers table.”

Going forward, however, a slightly more difficult question looms for investors, does one double down on safe haven assets, or does one go into risk assets that have sold off significantly?

In part, this depends on whether one thinks the worst will soon be over, or if what we have seen is just the beginning, after all few people would advise one buy contents insurance, while one’s house is on fire.

A little caution needed

Alec Stewart, CEO of Anderson Strathern Asset Management is one of those who are cautious on jumping headlong now into safe haven assets.

“We have been a bit uncertain about gilt valuations for a while. And, without wanting to push investors up the risk chain unnecessarily, I would question how defensive a lot of so-called defensive assets are at present,” he said.

As a result, while he admits that there are certain UK-centric stocks where one would want to exercise caution and do a lot of homework, he said: “I would also caution against a headlong rush into safe-haven assets now.”

Instead, he said, the firm is currently overweight phiscial property, corporate credit and within its equity portfolio, has a tendency for global equities. But, within its UK holdings, it is weighted toward the larger commodities players.

Coram Asset Management director, James Sullivan said took a slightly different view, but agrees that there are opportunities to be had in the current volatility.

While the firm had done little in direct relation to the vote as, he said, the firm didn’t know what the outcome would be, the firm’s funds benefitted from its positions in the dollar, yen and Singapore dollar as well as its gold holdings.

But, he added: “The referendum result was a wonderful example of an event not ‘being priced in’ and we took that opportunity to increase exposures to risk assets across all three portfolios.”

In particular, he said, the firm has added to UK equity with a bias towards value; European equity with the DAX on 13.5x P/E; and developed our position in Land Securities.

And, while Sullivan argues that “rotating cash-like assets into risk assets at materially lower levels is very rewarding over the longer term”, he acknowledged that even with the falls seen on Friday, valuations remain at elevated levels. .

“We feel that there is more downside to come in the equity markets, but we can’t be sure if that’s tomorrow, or over the next quarter.  So why have we increased risk at this stage?  We’d rather be early for the boat than miss it altogether,” he said.

"Few people would advise one buy contents insurance, while one’s house is on fire."