11 June 2021

Asset Allocation Focus in Summer 2021

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

Short term drivers include sustained high commodity prices and the growth-to-value rotation. Long term, the sector is in flux from the more traditional to the new green economy commodities.

Consumer
Staples

We like the sector for its defensive attributes and high quality businesses and it has shown its resilience recently. However, it is viewed as a bond proxy so vulnerable to rising rates.

Consumer
Services

More normalised consumer spending patterns provide near term tailwinds. Longer term we continue to favour e-commerce names and those business further along their digital transformation journeys.

Financials
ex Banks, Life Insurance, Property

This includes a broad range of stocks which are generally geared to investment markets. Valuations not at a level to turn more positive.

Financials
Banks

Banks are benefitting from steepening yield curve but tend to operate in the sub-five year space where the yield curve is flat. They have played their part in the COVID-19 crisis as part of the solution rather than the cause, so we should see less onerous tax and regulation.

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. We would rather see more visibility from the impact of easing lockdowns before becoming positive again.

Financials
Life Insurance

A problem is a lack of growth for companies without exposure to Asia with perhaps the exception of L&G which has carved out a niche in the bulk annuity segment for itself.

Financials
Real Estate

Global real estate may offer better value. Caution on bond proxy status and COVID-19 impact.

Health Care 

Growth and defensive attributes and global demographic tailwind.  Distinguish between pharma/healthcare/biotech sub sectors.  Remains a key theme for medium term, reinforced by current crisis.

Industrials

We see increasing evidence that economic activity is improving and see this broadening out over the coming months.

Energy

Structurally the sector remains under pressure, but short term catalysts lead us to be more constructive.

Information Technology

Long term we like the structural tailwinds that provides support for the sector. However, near term we believe heightened valuations are susceptible to rising bond yields. We favour more cyclically exposed names that are likely to benefit more as the economy unlocks. 

Communication Services

Changed consumer behaviours could persist in these segments and see further growth. Equally, digital advertising names have cyclical upside potential as a strengthening economy and lockdown easings are expected to support a revival in marketing activity.

Utilities

Sector has seen some safe haven support however is not immune from the slowdown as business customers suffer. 

 

UK EQUITIES

UK

 

Potential for relative improvement. Positives: Cheap on a PE basis. Great vaccination programme. Negatives: Brexit risk from logistics (all be it receding ~ but watch Jersey-like scenarios).  Heavy on cyclicals but these are ESG poor (oils and miners) as Shell’s Dutch court case highlights.  Risk of GBP weakness.

 

INTERNATIONAL EQUITIES

North America

 

Fears of over-heating could deter investors. But support comes from huge stimulus package. Positives: Slow global COVID-19 recovery could draw out tech rally. Strong stimulus and supportive Fed as employment is low. Strong earnings season. Negatives: Rotation out of growth/ tech into value ~ US is growth heavy.

Europe

 

Eurozone is a global cyclical and value play, trading cheap. Their Recovery Fund will start to be implemented in the summer and the labour market is resilient. The value trade is likely to help the region. Positives: €750 billion support package.   Negatives: Slow COVID-19 vaccine roll out. Too much ESG focus could increase cost of capital.  Chinese demand for European products might be weak on tight Chinese monetary policy.  The doom loop for local banks is a black swan that we watch.      

Japan

 

Japan is a traditional global cyclical play, with a positive correlation to bond yields and to PMI direction. Japanese valuations appear attractive and positioning looks light. Positives: The yen always has the potential for reverting to safe harbour mode if COVID-19 variants allow this episode to drag on. Japan is OW industrials and consumer discretionary for the value trade.  Negatives: We are cautious of much needed corporate reforms delivering on their promises and driving higher ROEs although more share buy backs will help.  The vaccine roll out has been unimpressive.

Asia Pacific

 

China still appears fundamentally attractive.  Positives: China is not imploding under a debt burden as many once feared.  Instead, leverage is supportive for Asia Pacific equities unless tightening is too strong.  China was first into the COVID-19 pandemic and should be first out in a way that leads the region.  Korea and Taiwan should benefit from the surplus of semiconductor chip demand. Negatives: Rebound in USD through to Q321 might hurt emerging markets in this region.  Regulatory crackdown (Alibaba and Meituan).

Emerging Markets

 

We have a preference for China and other countries with sound macro-economic policies, such as Korea, Russia, and Mexico.  EM should do well in 2H, given global growth convergence and easing in trade uncertainty. The near term risk is focused on Latin America if USD strengthens (short term) and if China’s tightening leads to stalling commodities. Positives: USD weakness seems likely in the long term (post rates adjustment) and a gradual improvement in commodity prices (linked to a Chinese infrastructure stimulus) could help those emerging markets more sensitive to commodity exports.   Negatives: Brazilian and Indian COVID-19 is a worry and raises the risk premium. A slow vaccine roll out in the region is not helping.  Russian sabre rattling at Ukraine (tanks on the border) is not good for the rouble.

 

BONDS

Conventional

 

The prospect of inflation, driven by the temporary impact of base effects and demand being fed into a sub-optimal supply chain continues to be a concern.

Corporate

 

Given our overweight equity position, we would prefer to be underweight corporate bonds. There is a possibility that corporate spreads could reduce further but we continue to think the upside from spread contraction has probably reached its limit.

Index Linked

 

Pricey inflation hedge. Positives: Hedge against inflation increasing from loose monetary and fiscal policy. Negatives: Expensive negative yield curve in the UK.

 

CASH

Cash

 

Cash has a poor yield but keep some on the side-lines for a possible pullback.

 

PROPERTY

Property

 

Real estate lies somewhere between equity and bonds and we still prefer equities.  Choose exposure with care and avoid poor quality retail. 

 

ALTERNATIVES

Alternatives

 

We prefer to make more precise calls in equity, cash and fixed income.  We like infrastructure and gold as diversifiers within the sector.

Understanding Finance

Helping clients understand what we do is key to building relationships. To explain some of the industry jargon that creeps into our world, we’ve pulled together a section of our site to help.

Managing your wealth

Managing your wealth


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Summer Issue Thirty Five