Carl Stick, manager of Rathbone Income Fund, is one manager who has been adopting a more defensive stance, based on the premise that the US economy is not robust enough to respond positively to a rise in base rates in December.
Interestingly, while the defensive ‘bond proxies’ that have been favoured by markets in recent years could be the losers in a shift in market sentiment, Stick has reallocated funds into the tobacco and utility sectors, through new positions in Altria and WEC Energy, and by adding to SSE in the UK.
He explains: “This may seem counter-intuitive considering the reaction of equity and bond markets post the result.
“However, our fear has been that the US economy is not strong enough to accommodate a tightening rate cycle, and the election result does not change that view. Although Trump’s plans are stimulatory, it will be difficult to fund them.”
In the short term, bond yields may rise, on account of increased borrowing to finance spending plans, helping financials, and hindering bond proxies.
However, in the longer term, Stick and others are well aware that an economic downturn may swing the pendulum the other way.
