Investment Conundrums: Kames Capital CIO Stephen Jones On Shifting Portfolios To A 'resolutely Neutral' View

Speaking to Investment Week, Jones explained Kames' portfolio managers are currently concerned by slowing growth, fragility in the Chinese economy and ongoing uncertainty on Brexit, but understand there are opportunities in the market as a result of the apparent policy reversal from central banks.

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The US Federal Reserve indicated last month that it will not raise interest rates again this year, with some investors now betting on a rate cut, while slower-than-expected growth has seen similar action taken from other central banks.

Jones said: "Portfolios have to be more balanced at this stage [of the market cycle], which seems about right given two years ago you would have been very underweight bonds and very overweight equities."

He explained the house view is currently "not too hot, not too cold" as Kames looks to limit potential risks while ensuring it does not miss out on potential investment gains by being too underweight asset classes.

Jones said: "We are resolutely neutral because there is carry in markets.

"There are markets that might have been pressured by continued monetary policy tightening, like bonds, high yield spreads and bond-like equities - their outlook has stabilised and become worth considering on the back of policy changes from central banks.

"If rates are not going to come up - and there is pretty clear evidence that they are not - then the carry involved in these markets is attractive.

"You are back to an uneasy world where there is no alternative to certain assets and policymakers seem happy to support them

for a little longer.

"You take that carry and that activity in an almost unenthusiastic sense, where you do not find yourself too overweight anything - but it is also expensive to be short a lot of asset classes." 

European growth 'not robust enough'

The changing state of affairs in central bank policy has also exacerbated Jones' concerns for Europe, where faltering growth and various country-specific issues have left the outlook divided from an investment perspective.

Worrying data has emerged in recent months about the economic health of the eurozone, which saw GDP growth of just 0.2% in the fourth quarter of 2018 while economists expect total growth in 2019 to fall from 1.8% last year to 1.6%.

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The European Central Bank's (ECB) signalled intention to maintain interest rates, while ending quantitative easing in the region, has Kames worried about the region from an investment perspective, Jones said.

He explained: "With the ECB's end of QE and a shift in interest rate policy, the evidence shows that economic activity is not robust enough to cope with that.

"The amount of stimulus poured into Europe produced growth rates of just 2%, which were not particularly balanced or stable either."

Jones added there are also "real difficulties" for the likes of Italy, while there is a "pretty aggressive slowdown in France" and ongoing Brexit uncertainty, all of which are "50/50" in how they will impact markets.

He said: "It is difficult to come out with a significant majority opinion one way or the either on what will happen."