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HEDGE YOUR BETS
Anthony Luzio finds out how fund managers are protecting themselves against what they believe to be the biggest threats to markets in 2017
A GAINST EVERYONE ’ S
EXPECTATIONS , Brexit and Donald Trump ’ s win in the US presidential election caused equities on both sides of the Atlantic to rocket last year . However , political uncertainty and record highs in markets make uneasy bedfellows , especially when combined with rising inequality and a global economy that has yet to reach escape velocity .
With what looks like many of the ideal conditions for a crash in place , it may come as a surprise that the most common threat highlighted by UK fund managers this year is not to the downside , but to the upside – meaning they are more worried about making a real return in the face of rising inflation than of protecting against falls .
HOW DOES IT AFFECT ME ? David Coombs , head of multiasset investments at Rathbones , says his view of what constitutes the biggest risk in the market is based on what is the most likely to occur and what will have the most significant impact on his portfolios . Against this criteria , he is most concerned about the uncertainty surrounding Brexit , which he believes will worsen this year with the government set to go to the Supreme Court in a bid to overturn November ’ s High Court ruling .
“ Whether you are a Brexiteer or a Remainer , this isn ’ t helpful to anyone ,” he said . “ It stops people making decisions on things like investment and capital expenditure .”
However , he believes the most immediate threat to come from this uncertainty is a further depreciation in sterling , especially compared with the dollar and the yen , causing inflation to rise steadily throughout the year .
“ This short-term currency weakness could lead to costpush inflation , or in other words stagflation [ a combination of slow economic growth and rising prices ]. It doesn ’ t even need to break out – just the perception of it is enough to cause problems . I think there is a high probability of this ,” he added .
Aside from some of the more obvious methods of protecting against this type of inflation , such as holding companies with pricing power or those that derive the majority of earnings from overseas , Coombs is using commodity trading adviser funds , which offer both long and short exposure .
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