Asset Allocation Focus in Winter 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

Hard commodity markets have shown resilience throughout 2020 helped by demand from China. Drivers include sustained high commodity prices and the growth-to-value rotation.

Consumer
Discretionary

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

Consumer
Staples

We like the sector for its high quality businesses and resilience.  Although valuations do not look stretched, they are not cheap, and the sector is vulnerable to rising input cost inflation, which has historically squeezed gross margins. 

Diversified Financials

Many names are high quality but valuations are not at a level to turn more positive.

Financials
Banks

Banks are benefiting from the continued steepening of yield curves which should allow net interest margins to expand.  UK listed banks now represent good value and see more near term upside versus US.

Financials
Life Insurance

The main business problem is a lack of growth for any company that is without exposure to Asia.

Real Estate

Global real estate may offer better value but again caution on bond proxy status and impacts from the pandemic.

Health Care 

Demographic tailwinds and the relative resilience of global healthcare spend mean this is a sector with growth and defensive attributes. Distinguish between biotech, life sciences, medtech and pharma. A greater weighting in the sector is to those which have been negatively effected by the pandemic i.e. elective surgery exposed names, which still offer reasonable valuations and encouraging long-term outlooks.                          

Industrials

We continue to see increasing evidence that global industrial production is improving and see this broadening further as we exit the pandemic period.

Energy

The ongoing pandemic recovery and sensible OPEC target production growth has resulted in an oil price rally. The sector remains structurally under pressure due to environmental concerns.

Information Technology

We like the structural tailwinds supporting the sector. We would return to a positive view should bond yields stabilise. We favour more cyclically exposed names that are likely to benefit more as the economy unlocks. 

Communication Services

Some sub-sectors performed well through the pandemic such as online gaming and online media. Changed behaviours should persist, but we do see tough earnings comparisons against exceptionally strong 2020 numbers .

Utilities

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

 

UK EQUITIES

UK

 

Positives: Cheap on a relative PE basis. Brexit risk, an unlucky resurgence of Delta COVID 19 and unlikely Scottish devolution risk are priced in.  Heavy on cyclicals which will do well if global growth continues and if China relaxes. Expected mild inflation will help asset prices. Fiscal responsibility driving “Goldilocks” growth. Negatives: FTSE100 is heavy on ESG-poor oils and miners and lingering inflation risk.

 

INTERNATIONAL EQUITIES

North America

 

Positives: Fears of over-heating are waning with on-going support coming from large but post-peak fiscal spending programs aligned with a perception that any deceleration of economic and employment growth will deter monetary tightening. Slow global recovery could draw out tech rally. Ending wage support schemes should increase the supply of workers and help control wage inflation. Past peak stimulus. Negatives: Re-start of rotation out of growth/ tech into value.

Europe

 

Positives: The €750 billion Recovery Fund is now being invested. Christine Lagarde is dovish helping asset prices. Negatives: Too much ESG focus could increase cost of capital. 3% inflation might press ECB hawks to taper. The doom loop for local banks is a black swan to watch whilst high unemployment is still a drag.

Japan

 

Japanese equities have risen on the back of Suga’s resignation and likely political change. Positives: Japanese valuations appear attractive and positioning looks light. The yen has the potential for reverting to safe harbour mode if COVID-19 variants extend the pandemic. Japan is OW industrials and consumer discretionary for the value trade.  Negatives: We are cautious of much needed corporate reforms delivering on their promises although more share buy backs will help. The vaccine roll out has been unimpressive. Watch for quiet Bank of Japan tapering.

Asia Pacific

 

Positives: China is not imploding under a debt burden as many once feared and we are impressed with China’s ability to exercise monetary restraint without driving an overly negative reaction. We think that regulatory crackdowns are coming to an end. Korea and Taiwan should benefit from the surplus of semiconductor chip demand. Negatives: Rebound in USD through to 2022 might hurt emerging markets in this region.

Emerging Markets

 

We have a preference for China, Korea, Russia, and Mexico. The near term risk is focused on Latin America if the USD strengthens and if China’s tightening leads to more 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 markets sensitive to commodity exports. Brazil, India and Russia have managed their third COVID 19 waves lower. Negatives: COVID-19 variants into relatively unvaccinated populations are always a worry and raises the risk premium. Political risk remains and supply chain issues abound.

 

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 and a compromised supply chain. 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.

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