Inflationary fears form the backdrop to good indicators for several markets and sectors, but there are robust defensive moves investors can be taking to mitigate the risks.
Warnings come over consumer staples.
Property and commodities also causes for concern.
Relative value seen in Asia.
Major dislocation seen between growth and value in equities.
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Looking ahead to April 2016, the illusory safety of consumer staples, value investing and agriculture investment are top of the agenda, along with inflation and real assets.
Simon McGarry, senior equity analyst at Canaccord Genuity Wealth Management, investment tips:
Until recently, the consumer staples sector was one of the sure-fire options for investors looking for steady returns. The sector has always been a relatively steady ship, chugging through the business world – whatever is happening around the globe, people always need groceries. But times have changed and the last few years have seen grocers and the manufacturers who sell to them struggle in hugely competitive environment.
The sector has witnessed diminishing returns since its peak in 2010; operating margins were 12.5% last year vs. 13.9% then. Revenue growth has also tumbled in recent years and has even turned negative (on a per share basis).
Consumer staples dividend yields have also been falling, in contrast to the UK market where yields have been rising. What is most worrying is that at the same time dividend cover has become increasingly stretched across the sector.
And despite lacklustre returns, margins, growth and dividend cover, we are witnessing some eye-watering valuations in consumer staples, even though they are offering increasingly less exciting growth prospects than previously. As a result their valuations are being propped up primarily by low interest rates, as investors search for quasi-bond like investments with reasonable yields. Although these equities may appear attractive versus bonds, we feel that this is one of the most overvalued parts of the UK market at present.
Senior equity analyst at Canaccord Genuity Wealth Management
Rob Morgan, Investments & Pensions Analyst at Charles Stanley, investment tips:
In April thoughts turn to a new tax year and an opportunity to use valuable tax-efficient allowances such as ISAs. Most investments are subject to tax, and with changes surrounding taxation of dividend income it could be particularly important to structure affairs appropriately.
In terms of investment choice, with seven years of ultra-low interest rates, many investors will be looking for a higher return and be willing to take some risk in search of this. Following January’s wobble, stock markets have recovered their poise and we believe pockets of good value remain.
In particular, funds taking a contrarian, “value” approach seem to be due a resurgence, and there appears to be some relative value in Asia. Rather than worrying about today’s negative headlines, especially those related to China, we believe investors should look to the future and consider how things will look in a decade or two. Long-term growth should be underpinned by increasing wealth and a burgeoning consumer sector. Gloomy sentiment appears to have depressed the value of equities in economies that have long-term promise.
Investments & Pensions Analyst at Charles Stanley
Giles Rowe, Chief Executive and Chief Investment Officer at Henderson Rowe, investment tips:
In our portfolios we have a corner for “real assets” – property and commodities – and there may be some interesting opportunities coming into view investors will have to take real care. Although high-end London property has cash backing thanks to “tax-efficient” inward investment of £100bn over the last six years, even super-prime valuations are now vulnerable and the sector overall is generally leveraged and illiquid. It is therefore very sensitive to shifts in the direction of background growth and to interest rates.
Brexit is a factor here, though a weak pound could encourage foreign investment. UK REITs and housebuilders began to sell off in the third quarter of 2015 but have since won back some ground. Yields are tempting, 3% to 4%, and Price to Book is below 1x for REITs. The UK is late cycle, though housebuilders still see strong demand; Europe is interesting and less saturated with investment.
Elsewhere, commodities and energy stocks are hated amid foundations, charities and other politically-sensitive institutions divesting their fossil fuel investments on principle. Low oil and gas prices have slashed rig counts and US crude production is set to fall 1.7m barrels per day from 2015’s 9.7m to 8.0m by 2017. There is so little good news that we are beginning to reinvest in oil stocks with decent cash flow cover.
Chief Executive and Chief Investment Officer at Henderson Rowe,
Tom Becket, Chief Investment Officer at Psigma, investment tips:
“Value” investing has consistently and considerably outperformed over the last one hundred years. There have been periods of underperformance, but ultimately the results of buying cheap, unloved shares has gone on to be very successful.
Opportunities exist across all markets at this time, but some of the biggest dislocations appear in European and Asian equity markets. In Europe, there is a mighty valuation divide between those companies perceived as safe and those deemed risky, because of their cyclical nature. Our view is not that you should go out and buy a load of optically cheap shares because a number of them will be poor-quality companies and “value traps”. But there will also be winners discarded amongst the rubble and in our portfolios, we are explicitly investing in a long-term value theme through River & Mercantile World Recovery, which is heavily weighted towards Europe at this time.
Of course, in a world where risks seem permanently high and there are plenty of “known knowns” and “known unknowns” to plague our working lives, it would be wrong to solely pursue a deep value approach. However, the major dislocation between growth and value areas of equity markets dictate that investors should reassess their positioning and create a better balance within their portfolios.
Chief Investment Officer at Psigma
Claudia Quiroz, Quilter Cheviot’s Executive Director of sustainable investing, investment tips:
Agriculture is not a market for the faint-hearted, with volatility inherent in both the creation of the product, and how the market reacts to it. Farmers can’t reliably predict, for example, how much wheat they are likely to produce in a given year. Due to the impact of supply and demand on prices, they find it difficult to predict what prices they will receive for their product
It is, then, a somewhat precarious investment category. However, some of farming’s vulnerabilities as an industry can actually lead to opportunities for the investor. For example, agriculture currently consumes more than two-thirds of the world’s fresh water for both irrigation and livestock rearing. The requirement for water is driving utilities and regulators to explore ways of maximising water supply, such as new types of infrastructure (e.g. reservoirs, water pipelines and desalination) and new operating models which can help drive greater levels of water efficiency. Similarly, many farmers are adding a side-line in the production of renewable energy or exploring the possibilities of getting the most out of their land by generating solar farms.
As the agricultural industry seeks new ways of operating in, and catering to, a carbon-constrained world, we expect innovations like these to see favourable returns on investment in the coming years.
Editor’s note: Quilter Cheviot are sponsors of BBC Countryfile Live, a new countryside event that will bring Britain’s most-watched factual television show to life. The show will run at Blenheim Palace from 4 – 7 August.
Executive Director of sustainable investing at Quilter Cheviot
Lee Goggin, Co-Founder of findaWEALTHMANAGER.com, says:
I recall a time when inflation was considered to be bad and would inflict a serious blow to economic performance. I also remember when high oil prices were also seen negatively and made things difficult for importing countries. Recently, it seems inflation is not as unwelcome as it once was and a higher oil price is sought to help stabilise the oil majors and the relied-upon dividend stream.
Nowadays, investors are confronted by a world that at times seems upside down. Tax changes, low investment returns and geopolitical risks – to name just three factors – have helped to confuse even the most experienced investors. Devising a portfolio that can outperform the market in unprecedented environments and which remains resilient in the face of unforeseen events is a truly challenging task.
Over the last few months, central banks have tried to reinvigorate the investment horizon by reducing the yield on fixed income assets to very low levels. The hoped-for stampede into assets with a higher potential return has ensued, however the future potential of these assets when artificially stoked is usually limited. With interest rates globally nailed to the floor for an extended period, other markets suffer from occasional asset bubbles as investment returns are sought out.
These are tricky markets to navigate and in times of stress and confusion it is worth seeking professional help to help minimise the risks facing your portfolio – and therefore your wider financial plans.
To start a conversation with any of the wealth managers in this article please contact the findaWEALTHMANAGER.com team HERE or you can try our smart online tool and see which firms match your profile.
Co-Founder of findaWEALTHMANAGER.com
The investment strategy explanations contained in this piece are for informational purposes only, represent the views of individual institutions, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment decisions.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.