Investors wondering what to do with their pensions, investments and savings face an uncertain environment on various fronts as the unpredictability of Donald Trump, the US president, shakes up the markets.
Equities have been volatile and the dollar has had its worst start to the year since the 1970s due to uncertainty around Trump’s tariffs and geopolitical events. Fixed income is not playing its usual “stabilising” role in a portfolio to counter inflation concerns, with some wealth managers saying they no longer believe in the traditional 60-40 model of equities versus bonds.
Gold is still seen as a haven but is at a record high price. Cash doesn’t yield as much as it used to, while some investors are pondering the end of US exceptionalism that has helped drive American stocks to record highs.
This has led wealth managers to stress diversification as a way to hedge against the uncertainty and volatility gripping the markets this year.
“You have to think about going into the world more diversified. Is your portfolio really resilient to the increased risk of fat tails [extreme price movements]?” says Justin Onuekwusi, chief investment officer at St James’s Place, the wealth manager.
FT Money looks at various hot topics and speaks to chief investment officers at UK wealth managers to get their views on what investors need to consider when investing for the long term.
Foreign exchange risk
The dollar index has fallen by more than 10 per cent since January, its worst start to the year since the end of the gold-backed Bretton Woods system in 1973. It is currently at its weakest level against rival currencies in more than three years. That poses a threat to investors’ portfolios, many of which have been overweight US equities or using US Treasuries as a safe haven.
Investors have cautioned that Trump’s stop-start tariff war, the US’s huge borrowing needs and concerns about the independence of the Federal Reserve have eroded the appeal of the greenback as a haven. Some have even argued that there is a significant threat to the dollar’s status as the world’s reserve currency, with demand for other assets such as gold on the rise.
Guy Foster, chief strategist at RBC Brewin Dolphin, says that some clients are, as a result, requesting more hedging in their portfolios against currency swings.
“Some investors who find hedging more difficult may choose to be underweight US equities in case of further dollar weakness, if their reference currency is not in dollars,” adds Caroline Simmons, chief investment officer at Quilter Cheviot, pointing out that while the S&P 500 has a positive return this year in dollar terms, it is negative for sterling investors.
Onuekwusi says currency risk is often overlooked, pointing out that holding non-sterling currencies is the second-biggest driver of risk for sterling-based investors after equities in portfolios.
However, hedging has downsides as well — it is an extra cost, and also means that when currency moves are in your favour you don’t benefit from them as much.
Overall, the outlook for the dollar affects the position wealth managers take in other areas of portfolios, including US and European equities, gold and other safe havens. Onuekwusi argues that US equities are more shielded from the risk of Trumponomics than the dollar and US bonds, as companies have global earnings that aren’t necessarily dictated by US politics.
Is the US still exceptional?
US equities have been a good bet for investors, with the S&P 500 returning more than 100 per cent in the past five years — provided they managed to hold their nerve during the dips. Sharp downward swings occurred during the bear market of 2022 and a period of uncertainty over Trump’s tariffs in April, for example.
The argument for US exceptionalism in financial markets is that US stocks and the economy are more likely to outperform than others. Yet there has been an argument for some time that the US market is both too concentrated on the so-called “Magnificent Seven” tech stocks and overvalued. While wealth managers think the US market will continue to perform well, many are now underweight US equities due in part to concerns over valuation.
Edward Park, chief asset management officer at Evelyn Partners, says the US is still one of the strongest drivers of earnings growth. “I would caution any view that the US equity market dominance is over. It’s a sectoral conversation and a relative conservation and the UK and Europe were undervalued so where we are now is probably fairly priced.”
Ed Smith, co-chief investment officer of Rathbones Investment Management, says that if it were a more typical market environment it would be overweight US equities, but given uncertainty over tariffs and fiscal spending, they are slightly underweight.
Simmons at Quilter Cheviot points out that the US market is still forecast to have higher earnings growth than Europe this year. But she thinks that the extreme outperformance of the US in recent years won’t continue as European economic growth plays catch up. Uncertainties this year, including whether Trump will impose more tariffs on trading partners and his “One Big Beautiful” tax bill, that is expected to increase the deficit, mean Quilter Cheviot is slightly underweight on the US.
Foster says RBC Brewin Dolphin is also slightly underweight US equities, pointing to concerns that Trumponomics will weigh on US returns and certain stocks may be overvalued. However, he argues the bigger force is AI and that the US is the leader in that field, so strategic stock selection is called for. He thinks the companies that will benefit most will be the enablers, such as semiconductor and interconnect companies that help to build AI networks.
Does the 60-40 rule for fixed income still apply?
The role of fixed income in a portfolio is changing, say wealth managers. Traditional portfolio construction theory calls for 60 per cent equities, 40 per cent bonds, as a rough rule of thumb.
Following this theory, bonds are meant to pay a stable income — due to their yields, which move inversely to prices — and they should have a negative correlation with equities, meaning at least one part of your portfolio is doing well at any one time. However, this theory received a knock in 2022, when equity markets performed poorly and inflation also rose, meaning both asset classes suffered at the same time.
Now, managers are not convinced it is the best model for the future. “We think that the golden age of the 60-40 portfolio that lasted from the late 1990s to 2022 is over,” says Smith. With more geopolitical uncertainty ahead, Rathbones has significantly shortened the duration of bonds it buys to just 2.5 years on average. Those shorter-dated bonds, Smith says, still offer a level of negative correlation with equities, so will have a stabilising effect on the portfolio.
Kate Morrissey, head of asset allocation at Evelyn Partners, describes the new normal as more “60 per cent equities and 40 per cent non-equities, rather than fixed income”. That could include hedge funds or gold.
“We’re entering quite a complicated growth-inflation policy rate mix,” she adds. As a result, Evelyn is also limiting its exposure to shorter-dated bonds.
Foster at RBC Brewin Dolphin describes the current environment as more of a “return to normal” after the financial crisis ushered in an unusual period where investors weren’t prioritising fighting inflation. Now, he says, “You’re less confident your bond element will perform well when equities perform badly.”
SJP’s Onuekwusi argues that bonds are attractive compared to equities on a risk-adjusted basis, but he recommends spreading rate risk across different regions, to avoid the impact of one country having a wobble.
Simmons argues that fixed income still has a “risk off” and diversification role, but since 2022 it no longer works as an inflation hedge. It’s also relatively cheap, she argues. “The valuation of fixed income is really attractive at the moment, so if the shocks don’t happen you still get a decent return, which you weren’t getting pre-2022.”
Many wealth managers say they are underweight corporate bonds, however, as they remain expensive relative to government and index-linked bonds, with the compensation for taking credit risk not as high as it should be given economic uncertainty.
Is it a good time to buy UK equities?
UK equities have not fared nearly as well as the US market since the pandemic, returning just over 40 per cent. Pension funds have been reducing their exposure to the UK, leading to efforts by the government to encourage more domestic investment. Global investors shunned UK assets after Brexit, though there is starting to be a reallocation — and wealth managers say the UK looks cheap after its unloved period.
“UK equities are really quite attractive relative to other markets,” notes Onuekwusi, pointing to political stability as one point in their favour. “It’s unlikely we’ll have five prime ministers in the next five years.”
“UK stocks look pretty good value,” agrees Foster.
While asset owners who sold UK equities after Brexit are starting to come back and investors look at where to reallocate their overweight in the US, Onuekwusi says the UK stock market is still underowned. But given that three-quarters of FTSE 100 revenue comes from overseas, he adds: “We do like UK equities, which is different from saying we like the UK economy.”
Simmons has a similar caveat: “It’s cheap for a reason, because it’s got lower growth.”
Some wealth managers caution against thinking about country specific allocations. Morrissey argues that the rotation from the US to Europe and the UK is not about the relative macro outlook for the regions, but about the composition of the markets and a move from growth to value stocks.
Yet wealth managers are divided over how much of an overweight, if any, UK investors should have in their home market.
UK wealth managers are on average overexposed to domestic equities, holding between 20-30 per cent in UK stocks, compared to just under 4 per cent on the MSCI World.
Smith at Rathbones thinks this is about right, arguing that sterling-based clients should have about 20-25 per cent of overall equity exposure in the UK.
Others are not so sure. Evelyn Partners has been reducing its UK exposure over recent years. It now stands at about a fifth, less than its peers. But in the coming years Park says he expects they will move more towards the MSCI World weighting.
“Time has shown that a global approach is best for clients,” says Morrissey.
Is gold the best safe haven asset?
Central banks have been buying gold in record levels due to concerns over dollar strength and geopolitical instability, leading to the metal overtaking the euro as the second-largest reserve holding behind the US currency.
The theory that gold protects against inflation and outperforms when other markets are going south has helped the price hit record highs.
RBC Brewin Dolphin is positive on gold, though it has reduced its overweight this year. “Gold has been a beneficiary of de-dollarisation and other precious metals don’t offer the same dynamics,” says Foster.
Morrissey says gold remains “an excellent diversifier” in a portfolio. The diversification in reserves away from the dollar supports the price, she argues, while it also takes tail risk away from big global market events such as wars.
Evelyn Partners is overweight gold, holding 4.5 per cent across its portfolios, compared to what it believes is 2 per cent across the wider wealth management industry.
Yet wealth managers are divided over whether the gold price is a sign of overvalue or of a structural shift in demand. Smith at Rathbones thinks increased demand from sovereign wealth funds and other institutions is likely to stay.
But Simmons at Quilter Cheviot argues that a lot of gold buyers come from the retail space, which can be “fickle”. While the precious metal feels like a safe haven to retail investors, she says, “the problem is it is very hard to forecast as it’s not adhering to normal drivers”.
Onuekwusi agrees that gold is hard to value. “It’s really hard to make a case for gold as a new investment today, given how much it’s moved and how quickly.”
What other assets might protect my portfolio?
Some wealth managers are using hedge funds as a diversifier in the face of inflation risk. Relative value or event-driven hedge funds look to benefit from corporate activity or mismatches in valuation between assets, so they can make returns even when the macro outlook worsens.
Macro or CTA hedge funds, which follow a big trend such as the dollar weakening, can generate performance even if it causes other assets to suffer. Quilter Cheviot buys both types of hedge fund for this reason.
Along with macro hedge funds, Evelyn uses gold as one of its main portfolio stabilisers in place of fixed income. Meanwhile with the dollar proving more volatile, others such as SJP are using the Japanese yen as a haven when equity markets fall.
