I hope that you are well and enjoying the summer sunshine, and now that the Greek issue is on pause, we have a space of relative calm to make some changes.

You are probably fed up with the Greek issue and its effects on markets so I won’t dwell on this. Only to say that, yes ‘the can’ has been kicked down the road yet again, so it’s still a case of ‘watch this space’.

What’s of greater interest to me, and which impacts on the global big picture, is the remarkable events in recent weeks in China. Whilst the media has been fixated on the Euro, the Chinese stock market crashed by 30%, half the stocks in their market were suspended, and the government ordered large shareholders not to sell! This led James Mackintosh of the Financial Times to quip that Chinese stocks are not an investment, just an alternative to spread bets on the cricket !

I have to say I agree, and rather disturbingly such manipulation shows that the Chinese economy is slowing at a dramatic pace. The actions taken by the Chinese authorities verged on panic, and the initial reaction has been to effect commodities and emerging markets. But if it persists it will trickle down into the mainstream.

The other main issue I have flagged this year is rising interest rates, which are scheduled in the US for this Autumn and the UK next Spring. The rise will be slow and gradual and ‘normal rates’ will still not be seen for some years. That said there will be an effect on fixed income and corporate bonds, which we have seen begin to fall in value recently. That’s because in a rising rate environment the capital value of bonds tends to stagnate or fall.

So something perceived as defensive within a portfolio can become more risky, and in the current environment fixed income and bonds are offering little value. So with your permission I would like to rotate out of some holdings whilst we are still overall positive and bolster the defensive part of the portfolio.

This is an extract from a client newsletter ‘Portfolio Realignments and Observations’ with instructions to bolster defensive positions

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