Asset Allocation Focus in Spring 2020

As part of our focus on providing a high quality, personalised investment service, we look to support our investment managers in their decision making when it comes to constructing client portfolios.

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 consists 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

Materials	We turned more cautious following a strong H1 2019 as macro economic indicators suggest global economy stuttering. Coronovirus is denting demand and commodity prices in short term however Chinese stimulus and dividend attractions lead us to a neutral stance.
Consumer Staples	We like the sector for its defensive attributes and high quality businesses. However, we are wary of valuations and the sector’s vulnerability to rising interest rates.
Consumer Discretionary	There are many high quality companies we favour in the sector however we acknowledge the short term negative impact of coronovirus on airlines, luxury, entertainment and travel sectors. Look for opportunities in those names we favour with structural growth characteristics.
Financials ex Banks, Life Insurance, Property	High levels of regulation, falling interest rates globally and a stuttering economy makes us reluctant to add to this sector. We see longer term structural headwinds as well as cyclical headwinds for the sector.
Financials Banks	Uncertain domestic outlook, falling interest rates globally and a stuttering economy makes us reluctant to add to this sector. We see structural as well as cyclical headwinds for the sector.
Financials Property	Whilst acknowledging the structural difficulties on the high street and concerns over liquidity in open ended vehicles we do see value in some areas of the sector.
Financials Life Insurance	Negative comments on selling off non-core assets, low interest rates, poor demographics in Western world and impact of Hong Kong demonstrations on Asian focused businesses.
Financials Real Estate	Global real estate may offer better value. Caution on bond proxy status.
Health Care	Growth and defensive attributes and global demographic tailwind. Distinguish between pharma/healthcare/biotech sub sectors. Remains a key theme for medium term.
Industrials	Focus on high quality defensive names for now as above. Watch possible sterling strength as a headwind.
Energy	Sector under pressure as supply/demand dynamics look less supportive for capital growth or capex expansion. Coronovirus impacting the oil price and further headwinds from an ESG perspective. Neutral stance but we cannot see catalysts for growth.
Information Technology	We are positive but be selective and wait for market weakness to add to the quality names.
Communication Services	Recently restructured sector - be selective and avoid traditional telcos.
Utilities	Sector appears to have ridden the wave of UK political uncertainty however share prices have moved to re ect the reduced risk.

UK EQUITIES

Following the General Election some of the uncertainty around Brexit has lifted. There will remain some political risk as the negotiations of a trade agreement progress and the likelihood of one being reached before the UK is due to exit at the end of the year, will be reflected through sterling. Nevertheless, we feel that sterling assets remain under-owned and present an attractive investment opportunity.

INTERNATIONAL EQUITIES

North America		Remains in a fundamentally sound economic position, which includes reasonable growth, low unemployment, real wage inflation and a more dovish Fed. With that said, we are wary that the equity market is increasingly pricing in a positive outcome to the trade war and the impact of looser monetary policy.
Europe		We remain underweight domestic European stocks due to longer-term structural concerns, such as political risk, higher unemployment and subdued inflation and economic growth. However, Europe has a high proportion of industrial and financial companies that will benefit if the manufacturing downturn reverses.
Japan		There are long-term structural concerns, though the recent use of fiscal stimulus shows a more proactive approach to addressing these. Japan is a net beneficiary regardless of the US/ China trade war, and there are continuing improvements in the economy that make Japan an area of interest.
Asia Pacific		Despite the recent progress in the trade war between the US and China, there remains the risk that the dispute can escalate once again. The outbreak of coronavirus will undoubtedly have an economic and, potentially, a political impact, the extent of which is unclear at this time. Together with unrest in Hong Kong and doubts over the efficacy of Chinese stimulus we remain neutral on the region.
Emerging Markets		A large part of the Emerging Market sector are Asian markets, particularly China, so the outbreak of coronavirus, added to Hong Kong unrest, mean we remain neutral on the sector.

BONDS

Conventional		While we see limited risk of interest rate rises in the foreseeable future, the negative real yields on o er make this an unattractive investment at present.
Corporate		Despite the current interest rate outlook reducing credit risk, we see credit spreads as offering little value without much downside protection.
Index Linked		Inflation has been subdued for some time but at a time when real yields on conventional gilts are negative, preference is for Index-linked gilts. Low-coupon index-linked gilts are attractive for taxpayers as the return they o er is a tax-free capital gain that is protected from inflation.

CASH

Cash

We have a neutral position for cash as we feel this provides us with sufficient optionality at a time of heightened volatility.

PROPERTY

Property

The result of the General Election has allayed some of the political concerns surrounding the sector, but Brexit risk has not entirely disappeared, nor have structural challenges to bricks and mortar retailers. Nevertheless, there are specific opportunities in high quality names and these provide an opportunity to get exposure to UK assets that will benefit from any positive developments in the Brexit negotiations.

ALTERNATIVES

Alternatives

Bottom up selection is key in this heterogenous sector. While real yields remain negative, we would highlight Infrastructure and Gold as potentially better diversifiers than Cash or Conventional Gilts.

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