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.
Investors tempted into longer maturities and more risky bonds.
Tech innovation and cyber-security offer interesting opportunities.
Margin pressure temper appeal of equities.
Many see stretched equity valuations.
findaWEALTHMANAGER.com is a gateway to the UK’s leading wealth managers and we regularly tap their expertise for the benefit of our users.
Looking ahead to November, our expert investment views focus on the implications of the US Election outcome and other political standoffs, along with the exciting opportunities presented by certain equities and technology innovation.
Alex Smitten, Head of Fixed Income at Cazenove Capital, says:
Large market movements occurred in the immediate aftermath of the UK’s referendum on EU membership. The unexpected “Brexit” result saw sterling depreciate by around 12% against the US dollar reflecting the likely lower path of interest rates and corporate bond risk premia rose as investors shied away from more risky assets.
Interestingly though, the corporate bond market rout only lasted a week, and within three weeks it was back to where it started. Not for the first time, markets were reacting to changing expectations of central bank policy. The European Central Bank (ECB) had just started buying euro-denominated corporate bonds, and the Bank of England (BoE) delivered in August with a cut in bank rate and another round of gilt and corporate bond purchases. We are now in a position where yields of most developed world bonds are exceptionally low and offer an increasingly small buffer against rising yields or risk premia. Indeed many government bonds yield below zero. Legendary bond investor Bill Gross goes as far as saying that ‘‘negative-yielding bonds should be viewed as liabilities not assets’’!
Due to the low levels of yield, the balance of risk and return has shifted dramatically against the buyer. As investors have tried to mitigate this they have been tempted into longer maturities and more risky bonds (for example, emerging markets) than perhaps they would normally consider appropriate. We should be prepared for some more volatile times ahead, particularly if central banks signal that they have reached the end of the quantitative easing road.
Head of Fixed Income at Cazenove Capital
Simon McGarry, Senior Equity Analyst at Canaccord Genuity Wealth Management, says:
When people think about innovation, they immediately think of the tech sector. And in tech terms, the US is dominant. Think about Apple, Microsoft and Alphabet (Google’s parent company), which are the three largest listed companies by market cap and dominate technological innovation.
In sharp contrast, integrated oil companies, miners, banks and consumer staples companies dominate the UK’s top 20. The largest pure-play tech player is ARM, ranking a lowly 22nd, which recently got snapped up by Softbank for £24bn.
But you don’t have to be a tech company to be innovative and there’s plenty of innovation in the UK. Well-established innovative businesses – which might use technology to change and develop – are definitely worth consideration. Here are a few of our top innovative stocks:
The recent history of innovation suggests that it’s unlikely that the next Facebook or Google will spring out of the UK. But we think innovation in the UK will continue to make a significant contribution to global technology advancements.
Senior Equity Analyst at Canaccord Genuity Wealth Management
Ben Barringer, Executive Director and Equity Research Analyst at Quilter Cheviot, says:
As we have seen in a plethora of headline news reports lately, the threat of cyber-attack is ever present and with that comes growing demand for cyber-security. Cyber-security is, therefore, a highly investable theme. The sector has strong structural growth potential as it evolves to keep up with the constantly moving target that is cyber-crime. There is no silver bullet solution, ensuring scope for a variety of cyber-security businesses to build their markets across a broad range of services. And security spending is on the up in terms of protection, risk management, detection and security services. The cyber security industry is booming and a conservative estimate would see it growing at circa 7%* – twice the speed of the IT industry as a whole.
Additional drivers for growth will come into play during 2017 and 2018 as businesses are required to meet incoming cyber-security related legislation. So we have a carrot and stick situation in place that seems set to continue, opening up opportunities for investors.
Opportunity must always be balanced against risk, however, and it is important to bear in mind that cyber-security stocks are growth stocks, so valuations can be quite high. Also, it is likely that, given the general upward trajectory of this sector, any slow-down in growth would be taken poorly by the market. There is also a risk of being impacted by technology obsolescence if you are not invested in the right technology leaders.
*Gartner’s Forecast Analysis, Information Security, Worldwide (Mar 2016)
Executive Director and Equity Research Analyst at Quilter Cheviot
Rob Morgan, Pensions & Investment Analyst at Charles Stanley, says:
Markets have had a good run so far this year, but there is plenty to worry about – from the US election, through the situation in the Middle East, to the state of European policy on both sides of the Channel. The next few weeks will provide some answers, but will likely pose further questions.
In this environment, it is important to remember there has always been a complex interaction between politics, economic activity and global markets, but today we have the considerable monetary support of the world’s central banks providing a backstop. It does not look as if any of the main advanced countries’ authorities want to suddenly remove monetary support, as they realise this would have a negative impact, not just on share and bond markets, but on the wider economy too.
Against the likelihood of a wobbly background in markets, we continue to believe long-term investors will be rewarded for taking risk, and that equities in particular remain attractive. Inflationary pressures on both sides of the Atlantic look likely to rise, and equities should offer some protection. However, selective stock picking could be valuable as the “Marmitegate” spat between Unilever and Tesco illustrates. The former attempted to raise prices by 10%, but in a highly-competitive industry it will be difficult for suppliers and retailers to push through entire cost increases to consumers. Somewhere, margins will get squeezed.
Pensions & Investment Analyst at Charles Stanley
Tom Becket, Chief Investment Officer at Psigma Investment Management, says:
We are expecting the next few months to present some potential challenges for investors, as stretched valuations offer poor support for political shenanigans on both sides of the Atlantic. In addition, we are trying to gauge the temperature of the global economy as we head into 2017. We worry that the consensus expectations for both economic growth and corporate profits are too high and some disappointment is likely.
The UK economy is both suffering and benefitting from the effects of Brexit simultaneously, and we are less optimistic about the outlook for the US economy than most: the US political backdrop is both poisonous and unpredictable. Meanwhile, Europe’s growth rate is going to structurally disappoint until the politics improve and decisive action in the financial sector is taken. To expect either of these is wishful thinking.
We have taken advantage of the healthy returns we have enjoyed across a wide range of asset classes in 2016 and reduced risk across our portfolios. However, we continue to find interesting investment ideas and have backed a number of great opportunities with high conviction, such as Japanese equities, the Asian consumption theme, inflation protection and specialist credit investments. We feel extremely confident with our portfolios strategy, and feel we are suitably and sensibly positioned to achieve our clients’ aims in what is possibly going to be a volatile period ahead.
Chief Investment Officer at Psigma Investment Management
Lee Goggin, Co-Founder of findaWEALTHMANAGER.com, says:
With the pound seeing a new 30-year low and the FTSE reaching a new all-time high recently, there is certainly plenty of volatility to enjoy if that’s your thing.
The story with the FTSE is easy to understand because a very large proportion of the companies that make up the Index derive much of their revenue from overseas markets and therefore benefit from the weaker pound when repatriating profits.
The story with the pound is really a continuation of the weakness seen immediately after the Brexit vote when investors decided to move away from sterling-denominated assets.
The interaction between markets is of course a natural feature of the ebb and flow of finance, but when you add political uncertainty, things can get very confusing. The upcoming US election and other votes in Europe next year will focus investors’ attention on a number of factors, but we tend to rely on the forecasters to predict outcomes and they haven’t had a particularly good track record of being correct recently.
That leaves the average investor with three options: the first is to do nothing and leave your hard-earned money in the bank earning close to no interest. The second option is investing on a DIY basis and hoping for the best, which can work for some, but learning the lessons necessary in this craft can be very expensive. The third is to let us help you find the right professional to assist you in making the most of your money. It’s easy and we are sure you will sleep better at night knowing you and your family’s money is in safe hands.
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.