11 December 2019

Asset Allocation Focus in Winter 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 turned more cautious following a strong first half of 2019 as macro economic indicators suggest global economy stuttering. Dividend attractions however remain and balance sheets are not stretched.

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

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

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

Some discounts in the UK are at historically wide levels due to Brexit concerns and structural issues facing the high street however we do see emerging value in some of the niche/ specialist areas of the sector which is where our focus is. We recently upgraded the sector.

Financials
Life Insurance

Supportive demographics, particularly internationally, however valuations appear fair value.

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. Remains a key theme for medium term.

Industrials

Valuations look more reasonable following the correction in 2018 but watch out for value traps eg. low price/earnings cyclicals as economic backdrop not supportive for the sector.

Energy

Oil price supportive for dividends between $55-$65 however supply/demand dynamics look less supportive for capital growth or capital expenditure expansion. Possible headwinds also from an environmental, social governance perspective.

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 and focus on quality compounders eg. Disney.

Utilities

Valuations now reflecting political uncertainty in UK. UK interest rates unlikely to move considerably from current level.

 

UK EQUITIES

UK

 

Heightened political risk means that we expect near term volatility, although on balance the greater risk is to the upside, both in high quality domestic names and overseas earners. While sterling weakness continues to make UK assets a target for opportunistic overseas buyers, we should be cognisant of our exposure to overseas earnings in case we see a lifting of headwinds and a strengthening in sterling. 

 

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. That being said we are wary that a positive outcome to the trade war and the impact of looser monetary policy is increasingly priced in. 

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. Accommodative monetary policy has supported equities for now, but the long term efficacy of this policy in the absence of fiscal stimulus remains to be seen.

Japan

 

We see similar structural concerns to those in Europe whilst also note lower conviction on our expectation for Chinese stimulus (a key export partner).

Asia Pacific

 

We are concerned around the risk of escalating trade wars and hold a lower conviction on the impact that Chinese stimulus will have. Whilst we continue to see it in the interest of both parties (the US and China) to agree a trade truce, we would ascribe a low likelihood of a near term resolution. 

Emerging Markets

 

As for Asia Pacific, we are concerned around the risk of escalating trade wars and hold a lower conviction on our expectation for significant Chinese stimulus.

 

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 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.

 

CASH

Cash

 

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

 

PROPERTY

Property

 

The sector generally trades at a large discount to net asset value due to Brexit concerns, structural challenges to bricks and mortar retailers, and the risk of higher inflation and interest rates in the future. Nevertheless, there are specific opportunities in high quality names to increase exposure to sterling at a level where the downside risk is limited.

 

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.

 

 

 

 
 
 
 
 

Also in this issue

Lives North YorkshireFamily Partner, and two Generation Z daughters, who make me laugh Education Fulneck Girls’ School, Yorkshire. And yes, my maths was good enough Started at JM Finn 2011Charity I’m…

Spirax-Sarco Engineering (Spirax) is one of the true great multi-national British engineering companies, comprising three complementary niche businesses operating in thermal energy management market,…

With a growing elderly population, putting in place an ‘attorney’ acting under a Financial and Property Affairs Lasting Power of Attorney (LPA) or Enduring Power of Attorney is becoming more…

Winter Issue Twenty Nine