The UK wealth management firm, part of Europe's Quintet Private Bank, takes a cautious stance on risk, such as reducing exposure to a US equity market that it thinks is expensive.

Investors are over-optimistic about expecting fewer further US rate rises, which suggests that the country’s equities could be due for a pullback, making the case for cutting exposure. Instead, it makes more sense to boost holdings of minimum volatility European stocks, wealth manager Brown Shipley has said. It described its overall stance as "moderately defensive."

The firm, setting out its mid-year outlook, also suggested cutting gold in flagship portfolios after a strong run by the yellow metal, freeing up money to go into sterling-based portfolios of hedge funds instead.  

Tactically, economic weakness caps the upside for risky assets such as equities, and the firm prefers holding high-quality bonds and has a reduced exposure overall to equities and credit. On the US stock market, the firm said the positive performance of these assets has been dominated by mega-cap growth stocks which have pushed up valuations; the market pricing of US Federal Reserve interest rates looks "too optimistic relative to our expectations, putting these stocks at risk."

The wealth manager set out its stance at a time when it thinks inflation will hit a peak in the US in the second half of this year; there will be a pause to the rate rises of central banks, while Chinese economic growth will rise, buoying the wider Asia-Pacific region. (As if to confirm the inflation point, official consumer price inflation from the US this week showed CPI rose 4 per cent in May from a year before, about half the rate a year ago.)

“More broadly, Western economies face ongoing bouts of financial instability and banking sector stress, leading to tighter lending conditions that will limit expansion,” Daniele Antonucci, chief economist at Quintet Private Bank – parent of Brown Shipley – said. 

As inflation peaks, rate hiking pauses and growth moderates, high-quality bond markets look attractive as history has shown that they tend to outperform equities in such conditions, according to Cyrique Bourbon, head of portfolio strategy.

“The late-cycle volatility we expect limits the potential upside in equity performance, and we therefore do not believe it is time to re-risk portfolios yet. More defensive, low-quality equities are comparatively attractive given their potential to mitigate downside risk while partially capturing the downside,” Bourbon added. 

In its tactical positioning, the firm said it is raising exposure to US-investment grade debt, pan-European minimum volatility equities, while maintaining increased exposure to US Treasuries, and maintaining increased exposure to Asia-Pacific stocks and US high-dividend equities. It is also maintaining reduced exposure to eurozone equities, and cutting its exposure to European and UK investment-grade debt, and US equities.