Careful stock-picking required

Monetary stimulus around the world is a contributing factor in our current asset allocation and investment strategy. We have been taking money out of the US, which is the most expensive of the major regions and where earnings and share price momentum has started to deteriorate versus other parts of the world. It appears that QE has done its work by helping the US economy on to a surer footing and our view is that a lot of equity upside from that is reflected in current valuations.

However, we see opportunities to benefit from ongoing monetary and economic stimulus in other regions. We have been putting some of the proceeds of our reduced US exposure into Europe, Japan and to some extent Asia Pacific – markets in which we are modestly overweight and where we feel there are equity gains to be had as a result of QE and other stimulus policies.

We are underweight the UK but following the General Election result, we have added to domestically-facing UK cyclical stocks, such as house builders and financials. We think these will benefit from the positive effect of the Conservative majority on consumer and business confidence.

Our investment philosophy is such that we are always looking for long-term positions. At stock level that often means businesses in a niche or specialist area, with unique or differentiated products and services which give them strong competitive advantages and market share. We’ve found some interesting opportunities on these lines in the UK engineering sector lately, which we are currently weighing up.

Elsewhere, we have been increasing our underweight in fixed income on concerns about flows from the bond market in anticipation of interest rates rising. We’re not expecting an all-out panic, but if investors start to see sustained losses in the bond part of their portfolio – supposedly a ‘lower risk’ asset class – then selling momentum could build.

Rosie Bullard Portfolio Manager, James Hambro & Partners

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