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 FOCUS
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Communications |
The telecoms sector has benefited from above-inflation price rises as many contracts factor in inflation increases, though this will abate now as global inflation rates are falling. Rising debt costs remain a headwind as companies are forced to refinance at higher levels. The portions of the sector more exposed to consumer discretionary spending would struggle in a recessionary environment. |
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Consumer Discretionary |
Inflation has fallen significantly and wage inflation, whilst declining, is lagging. Wages are rising in real terms, which has traditionally been good for consumer spending. Since the pandemic, consumer discretionary businesses have been supported by excess savings. These reserves are now largely depleted, so while real wage growth is positive for the sector, the risk of a rates-induced recession still looms. |
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Consumer Staples |
Input costs have been a headwind to the sector, however recent declines in inflation should reduce the problem. Pricing power has been resilient, however volume growth has suffered. Some of the sector is defined by non-discretionary demand and strong brands and recent retail results have been positive so there is an expectation of continued demand in a consumer slowdown. |
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Energy |
At low oil prices Shell and BP share prices are highly correlated with the oil price. However, above US$90 the relationship progressively breaks down because the share price anticipates demand destruction from higher costs. With Brent currently at US$83, the market appears to be pricing in expectations for weaker GDP growth and lower oil demand. |
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Financials - Banks |
Banks were recently criticised by politicians over deposit rates, yet many have large surpluses and might be relieved if some depositors withdrew cash. Whilst the UK’s Asian banks should see some growth, American and UK banks may face pressure from credit losses. Firmer rates are helping insurance businesses, although the prospect of the rate hiking cycle ending is not. |
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| Health Care |
The sector has been a laggard recently and there have been multiple profit warnings. Continued disruption to procedures, funding issues in biopharma, and concerns about a regulatory crackdown in China have impacted the short-term outlook. Longer-term demand remains resilient and the structural drivers associated with an ageing population are unchanged. The pressure in the sector makes valuations more attractive. |
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| Industrials |
The earnings of industrials, including those cyclically exposed have held up relatively well throughout the recent rate hiking cycle. Whilst some industrial indicators have shown some weakness in the second half of 2023, current expectations are for improvements in 2024. Industrial valuations have been downgraded, with many now below 5-year and 10-year averages, so the sector looks attractive on valuation grounds. |
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| Information Technology |
Sector performance has been strong, as expectations about the potential of AI have increased some share prices and valuations. The sector is exposed to interest rates and so passing the peak of the rate hiking cycle should be a positive. The lack of margin for error provided by valuations drives a neutral rating. |
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| Materials |
China is the largest single driver of the sector and its economic data has consistently underperformed. Longer term, supply and demand dynamics in metals still look attractive, and demand for metals as part of the transition to cleaner energy is strong. At the company level, balance sheets remain strong, albeit underperformance in a recessionary environment is still likely. |
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| Real Estate |
Rising interest rates have been a drag on the sector and caused property valuations to decline. As we pass the likely peak in the rate hiking cycle, the pressure on valuations is likely to ease and with this, we would expect real estate companies to perform better. For now, we continue to see solid occupier metrics. |
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| Utilities |
Index-linked regulatory earnings models have largely protected utilities from cost inflation and margin pressure. Many utilities operate in markets with inelastic demand, which should offer recession resilience. As a result, there is more positivity on the utilities sector with a preference for power, where there is greater regulatory clarity on earnings growth than the water sector. |
ASSET ALLOCATION
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UK |
The UK moved sideways over the quarter in spite of an August base rate hike. We started with fears of higher rates for longer which morphed into the perception that rates had peaked and inflation is falling. The Labour party conference left us feeling that investor confidence in a stock market friendly Labour administration is growing. |
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North America |
The Magnificent Seven companies (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) drove slightly stronger relative index performance in the USA last quarter. Inflation is at 3.7% and interest rate markets suggest that rates have peaked for now. In October the US economy grew at a rate aligned with an unemployment figure of 3.9%. However, the US is now expensive on a price/earnings basis and we are worried about investor support for the US Treasury market. |
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Europe |
Europe has seen future expectations for earnings rise over the last quarter, in contrast to the USA which has seen them fall. That said, earnings growth in Europe lags that in America on an absolute basis. Negative factors include fears over wage inflation, a weak Manufacturing Purchasing Managers’ Index (an index of economic trends in the manufacturing industry) and a tightening monetary policy; however, we think these are outweighed by the positive factors: a peak in rates and moderating inflation. |
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Japan |
In July the Japanese ten-year government bond rate was at 0.4%, which is where it was before COVID-19. It is now at 0.85%, which was last seen in 2013. The lift off started with Japanese inflation rising above US inflation in July, which fostered the idea that Japan might have to hike its interest rate. |
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Asia Pacific |
China is often the main focus in Asia Pacific. It appears that China is managing the balancing act of de-leveraging the property sector and punishing property speculators without casting the rest of the economy into recession. Its most recent 5% GDP growth rate suggests that this is being achieved. Long-term demographics for the wider region continue to look favourable and the region should continue to deliver growth, although keeping a close eye on the aforementioned property sector is necessary. |
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Emerging Markets |
Argentina may retain elevated uncertainty on the back of Javier Milei’s recent presidential victory. Milei wants to sack the central bank, dollarise the economy and slash public spending by 15% of GDP. This has not been tried before. Elsewhere, there is a risk that the Chinese renminbi remains under pressure until its economy rebounds and that this will exert a downward pressure on other emerging market currencies at the same time. |
