Asset Allocation Focus in Summer 2019

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 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

Materials	We see ongoing Chinese stimulus during 2019. Commodity markets are benefitting from this. Dividend attractions also support our positive 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 higher inflation on margins. We downgrade to neutral.
Consumer Discretionary	Focus on the disrupting companies and high quality brands. Structural growth and rising wages should support the sector. Note Amazon represents 15% of this sector.
Financials ex Banks, Life Insurance, Property	This includes a broad range of stocks which are generally geared to investment markets. Valuations now reflect the cautious lower growth outlook.
Financials Banks	Prefer globally exposed banks to domestic, look for beneficiaries of rising rates.
Financials Property	Some discounts in the UK are at historically wide levels however caution on Brexit uncertainty and structural trends impacting High Street.
Financials Life Insurance	Supportive demographics, particularly internationally, however the sector is a geared play on the market.
Financials Real Estate	Global real estate may offer better value but again caution on bond proxy status.
Health Care	Growth and defensive attributes and global demographic tailwind. Distinguish between pharma/healthcare/biotech sub sectors. Key theme for medium term.
Industrials	Valuations look more reasonable following the correction in 2018 but watch out for value traps e.g. low P/E cyclicals.
Energy	Demand/supply dynamics are becoming more favourable as year progresses. Dividends sustainable with oil at current levels and valuations appear attractive.
Information Technology	Traditional tech firms - Apple, Microsoft (make up 24%) with Visa, Intel, Cisco - be selective.
Communication Services	New restructured sector - Alphabet, Facebook, Netflix, Tencent (make up 30%) included with Verizon, AT&T, Disney and Comcast - be selective.
Utilities	Valuations now reflecting political uncertainty in UK. UK interest rates unlikely to move considerably from current level.

UK EQUITIES

Whilst political risk remains, we think valuations offer upside risk following prolonged underperformance. We have increasing confidence in our small overweight position on domestic names with a focus on mid cap opportunities. That being said, we continue to prefer high quality names and would avoid highly levered, cyclical businesses.

INTERNATIONAL EQUITIES

North America		Appears (for the near term at least) to be in the goldilocks scenario of strong growth, real wage inflation and a more dovish Fed. Whilst we remain overweight, we would be less inclined to add aggressively with the market now again near record highs.
Europe		We note that the high beta, cyclical nature of many European economies could lead to short term stock market outperformance for 2019 but given longer term structural concerns (such as political risk, high unemployment, north/south divide persist), we remain underweight.
Japan		We had previously been overweight, and whilst we still expect the tailwind from Chinese stimulus, we hold lower conviction in our bullish dollar view. In addition we do note longer term structural concerns.
Asia Pacific		Recent stabilisation in economic data should support valuations for the near term. We continue to add with greater conviction following signs of Chinese stimulus which will allow EM/AsiaPac equities to continue to recover from depressed levels.
Emerging Markets		As for Asia Pacific, recent stabilisation in economic data should support valuations for the near term. We continue to add with greater conviction following signs of Chinese stimulus which will allow EM/AsiaPac equities to continue to recover from depressed levels.

BONDS

Conventional		With inflation risk and rising interest rates we see significant duration risk and would remain short dated.
Corporate		Despite a rosier economic outlook, we see current spreads as offering little value with little downside protection.
Index Linked		With the threat of inflation globally we like the protection afforded by index linked gilts. However we would be wary on valuations here and would be selective in exposure.

CASH

Cash

We continue to (selectively) put cash to use where possible. Given our expectation for the current negative interest rate environment to persist, we would avoid any significant overweight cash positions.

PROPERTY

Property

Structural challenges alongside rising rates means we remain underweight the sector.

ALTERNATIVES

Alternatives

Bottom up selection is key in this heterogeneous sector. With the threat of higher inflation going into the next downturn, we would highlight Infrastructure and Gold as potentially better diversifiers than Cash or Conventional Fixed Income.

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