Overall

Our asset allocation is unchanged this month. For a moderate risk portfolio, we hold around 40% in fixed income, 35% in equities and 25% in alternative assets (gold and hedge funds).

These allocations exclude the option strategy, which protects about half the equity exposure, significantly reducing risk. Furthermore, the allocation to alternative assets is unusually high due to the late stage of the cycle and ultra-low yield environment.

Equities

We continue to maintain our core equity allocation this month, with a 35% allocation to equity markets and protection of approximately half the equity exposure.

Recent investment flows have shown an extreme shift from equities to bonds. While this would usually lead to a fall in equity prices, significant share repurchase programmes have supported prices.

We have also reviewed relative valuations in both the equity and bond markets. While equity valuations continue to be at the more expensive end of their past range, we believe they continue to offer better value than bonds.

The US market is more expensive than other regions but we believe this reflects the far stronger earnings growth the US has generated throughout this cycle, as well as higher margins and stronger returns.

Equity markets experienced an extreme rotation over the past month, out of momentum and growth stocks, which have enjoyed a strong period of outperformance, and into the unloved value sectors.

This move coincided with the recent rise in bond yields from their past lows, which supported the performance of financial stocks (a key component of the value sector).

While we do not see this as the start of a sustained period of outperformance for value stocks, it may signal a more balanced market going forward after the recent outperformance of momentum stocks.

In an economic environment in which growth is scarce, we believe stocks able to demonstrate strong underlying growth, as well as cash flow generation, will continue to outperform the market.

Fixed Income

Our analysis of market valuations suggests credit markets are fairly valued when considering the incremental spread they offer over government bonds. Spreads have tightened modestly in recent months and are in the middle of their historic range.

Credit spreads have proved reliable indicators of economic stress in the past and we take comfort from the fact that these spreads have been notably stable.

Government bond yields have risen from their historic lows over the summer but are still at very low levels driven by negative interest rates in Europe and Japan, low inflation and weak growth.

We see scope for some further increases in yields but given the subdued outlook for economic growth, we believe government bond yields are not far from fair value.

Bond markets expect further interest rate cuts from the US Federal Reserve this year (one cut) and next (two cuts) and further easing from both the ECB and the Bank of England over the next six to 12 months.

We have maintained our fixed income positions this month, following our de-risking of fixed income portfolios in August.

Alternative Investments

Portfolios currently have around a 20% allocation to alternatives and a further 5% allocation to gold. We continue to monitor gold prices and look for an opportunity to execute a call option strategy to participate in any further gold price rise. As yet there has not been a suitable entry point for the trade.

Currencies

We do not have particularly strong views on currencies at the moment, although we are closely following the volatility seen in sterling as it responds to developments in the Brexit process. In August we implemented an option strategy for sterling portfolios, which protects against a sharp rise in sterling. Given the rising probability of an extension to the Brexit timeline, we are looking into extending this protection further out into 2020.