Our asset allocation committee is one example of this, via their monthly output showcasing their views on a global basis; this is then complemented by a sectoral view from the stock selection committee. The combination of these top down and bottom up opinions is an important resource for our investment managers to validate their own investment theses or to generate new investment ideas.
These committees, which consist of members of our research team and a number of investment managers, aim to provide a view that seems most suitable in the current climate. The output of the monthly meetings remains a suggested stance and it is important to note, that the views expressed are those of the committees and may not necessarily be those of your individual investment manager.
Here we present a snapshot of the current views.
SECTOR VIEWS
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Communications |
We expect elevated demand for online services to fall back and consumers shift their spending habits. Digital advertising growth is also expected to slow versus 2021 as marketing spend moderates and instead corporates review discretionary spend in the face of rising geopolitical concerns. |
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Consumer Discretionary |
Consumer confidence is high and the jobs market appears robust but we are becoming increasingly worried about a turning tide. Rising energy and food prices may undermine consumer confidence and savings buffers. |
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Consumer Staples |
The sector can be hurt by rising bond yields but given growing concerns of stagflation and geopolitical conflict we think the path of rising rates may have moderated recently. |
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Energy |
Longer term aspirations for substituting hydrobarbons with renewables and energy storage will not stop the oil price rising to the benefit of the oil majors. Mutterings of windfall taxes are an obvious negative but undeveloped at this stage. |
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Financials - Banks |
US banks have enjoyed good performance on the back of strong balance sheet growth prospects and are now retracing as Ukraine delivers a shock to growth expectations and margin expansion. Higher inflation is likely to tame demand, reducing the need to hike interest rates. European banks are more exposed to Russia and suffer from large national debt and higher rates driving declines in their loan books. Margin expansion expectations for UK banks has been lowered given the diminished growth outlook. |
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| Diversified Financials | Many names are high quality but valuations are not at a level to turn more positive. | |
| Insurance | Life insurance companies benefit from a steepening yield curve but with higher rate expectations softening, we think neutral remains the correct stance. | |
| Health Care | Demographic tailwinds and the relative resilience of global healthcare spend mean this is a sector with growth and defensive attributes. Valuations have become stretched in growth names however a greater weighting in the sector is to those which have been negatively effected by the pandemic. | |
| Industrials | Global industrial production forecasts, although still positive, have fallen in recent months as supply chain disruptions and heightened cost inflation pressures weigh on broader economic growth. | |
| Information Technology | We like the structural tailwinds that provides support for the sector, however we believe heightened valuations are susceptible to rising bond yields. | |
| Materials | Drivers include sustained high commodity prices driven by supply disruptions. The risk is input cost inflation in the form of energy costs however this should be more than offset by higher realised prices for commodities. | |
| Real Estate | Global real estate may offer better value than other fixed income instruments but rising rates can feed through to mortgage rates, with the subsequent fall in demand for real estate hitting property valuations. | |
| Utilities | The sector has some safe haven support, however it is not immune from the slowdown as business customers suffer. |
UK EQUITIES
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UK |
UK equities appear to trade at a discount to global developed market equities and should hold up relatively better. Energy and materials sectors should provide better inflation protection and current geopolitical tensions are likely to keep oil prices elevated and financials should benefit from a rising interest rate environment. UK growth remains robust and unemployment is low but, the rising cost of living squeeze has increased growth risks ahead. Hence, our preference for consumer staples versus consumer discretionary. |
INTERNATIONAL EQUITIES
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North America |
Structurally, on a long term basis, we favour an overweight to US equities reflecting higher returns on capital and strong earnings growth potential, however, tactically we are neutral on US equities. UK investors have been somewhat cushioned by US dollar strength but we think US equities could experience further valuation de-ratings as the Fed hikes rates to tackle inflationary pressures. Recessionary fears are rising as the Fed seeks to soften demand amidst the global supply chain crisis. |
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Europe |
Growth in the Eurozone has been strong and it is our expectation that the European Central Bank will follow a more gradual tightening regime. The Eurozone is exposed to the fall-out from the situation in Ukraine; energy and food related inflationary pressures are a near-term challenge but higher levels of unemployment suggests inflation stickiness from wage growth is less likely. A potential rebound in China’s prospects later this year, could help Europe shine in 2022. |
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Japan |
Japan’s economic recovery has been poor and inflation remains stubbornly low. The Japanese central bank remains highly accommodative as it seeks to break Japan’s deflationary mind-set. Equities don’t look sufficiently cheap given the economic backdrop but the yen could strengthen if US bond yields stabilise or move lower. |
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Asia Pacific |
China seems to be managing the property crisis although this episode probably has longer to run and we expect modest loosening to feed through to the economy. Australia should continue to benefit from elevated industrial metal prices and Korea and Taiwan should benefit from the global surplus semiconductor chip demand. |
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Emerging Markets |
We prefer China within Emerging Markets; as lockdowns ease, we expect consumer pent-up demand to come through. We are more cautious on Emerging Markets outside China. Near term risk is focused on Latin America until China reflates. Central banks face a dilemma of whether to cut rates to boost their economies, or raise rates to protect their currencies in a stronger US dollar environment. |
BONDS
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Conventional |
Inflation, rising energy and food prices and sub-optimal supply chain efficiency suggests further upward pressure on interest rates so we prefer being underweight and in short dated government bonds. |
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Corporate |
Hedge against inflation increasing and a compromised global supply chain however US inflation-linked bonds look relatively more attractive. |
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Index Linked |
Given our overweight equity position, we would prefer to be underweight as spreads are tight and could widen if global recession risks rise from here. |
CASH
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Cash |
Tactically, we favour increasing cash but only as a short term measure, as inflation will erode the real value of cash over the medium term. |
PROPERTY
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Property |
Real estate lies somewhere between equity and bonds, offering up some level of natural inflation hedging. We prefer residential, industrial and warehouse exposures versus retail and office segments. |
ALTERNATIVES
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Alternatives |
Rising rates, low government bond yields and transitory inflation uncertainty leads us to like infrastructure and, to a lesser degree, gold as diversifiers. |
