Investment Bulletin:
November 2021

This month:

In this equities-focused Bulletin, our wealth management experts delve into the prospects for US mid-caps, cyclical stocks and high-growth technologies.
 

Expert investment views:

The likely effects of inflation on equities are examined, with challenges for cyclical stocks flagged

US mid-caps are predicted to perform well as both inflation and economic growth accelerate

Investors are urged to consider high-growth opportunities from enabling technology investments

Featuring this month’s experts:

1. Cyclical stocks likely to face challenges

Insights from:

Absent for much of the past decade, inflation is now starting to make itself felt as consumer demand builds in the run-up to Christmas and puts supply chains under even greater pressure. Central banks are warning of interest rate hikes in the coming months to stop inflation from spiralling out of control. The Federal Reserve has signalled that tapering could start by year-end and rates could rise before then. Anyone who remembers 2018 will know what happened the last time the Fed raised rates.

Rising inflation is putting companies under pressure as input prices rise and squeeze margins. This should reveal companies with real pricing power, which are able to increase prices without damaging demand for their products and services. Such an environment may favour value stocks over growth companies. The inflationary environment and rate rises may also challenge some of the valuations in the market, which have resumed their pre-Covid course upwards.

The inflationary environment and rate rises may also challenge some of the valuations in the market, which have resumed their pre-Covid course upwards

The prospect of higher interest rates has also put into question the sustainability of current growth outlook – particularly as financial support established during the pandemic by central banks and governments is withdrawn. This could pose challenges for cyclical stocks that are more heavily geared into the economy.

For now, developed markets seem to have the better prospects given the success of the vaccine roll-out during the prior quarters. This has been instrumental to the reopening of economies in 2021. Any rate rises should be gradual over the next year or so, with few central banks willing to put their Covid-struck economies at risk.

Quilter Cheviot - Shabbir Gulmali

Shabbir Gulamali

Investment Manager at Quilter Cheviot Investment Management

2. US mid-caps set to benefit from GDP growth

Insights from:

Since the third quarter this year our macro service has been flashing green, showing accelerating US growth. Inflation is also accelerating, so we need to think about assets that perform well in both circumstances.

US medium-sized companies collectively fit the brief. Within the Russell 2000 index (the next 2000 stocks down from the S&P 500) there are fast growing companies who should see particular benefit from the upswing in US GDP growth.

Within the Russell 2000 index (the next 2000 stocks down from the S&P 500) there are fast growing companies who should see particular benefit from the upswing in US GDP growth

We have been invested in this part of the market via a few different funds, including those run by Brown Advisory, Schroders and BMO, but the largest of our holdings is in the Granahan US Focussed Growth fund. Quite apart from my long-standing support of the fund, its digitally focussed portfolio should suit the macro environment well. The manager Drew Beja looks for “desert island worthy” companies; those which could be left for ten years whilst you spend the intervening time on said island paradise. Looking out at the grey Gloucestershire sky, this is indeed a tempting prospect. His companies tend to be expensive when compared to the market, but with much higher growth rates, and he weights his performance expectations by likely outcome: good, bad or indifferent. Another key decision point on a prospective company is whether he would be happy for his daughter to work there. If the answer is no, he doesn’t invest.

Drew himself doesn’t believe in macro, or at least in any investor’s ability to consistently forecast markets, and I have some sympathy with his point of view. And that is the joy of crystal ball gazing; if we are right about the macro environment, Drew’s fund should do well. If not, then patience may be required, but I have faith that in time he will deliver excellent returns.

Tyndall Investment Management - Edward Allen

Edward Allen

Investment Director at Tyndall Investment Management

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Top Tip

This month’s Investment Bulletin illustrates perfectly why savvy investors choose to partner with professionals. The granular knowledge one needs of each market and sector means that few people can reliably pick winners all of the time. You could benefit significantly from the huge research capabilities leading institutions bring to bear. Why not have some no-obligation discussions with the wealth managers from our panel to hear about the exciting investment opportunities they have identified?
Lee Goggin - Co-Founder

Lee Goggin

Co-Founder

3.Growth opportunities from enabling technology investments

Insights from:

The digital transformation of sectors ranging from transport to manufacturing and financial services will continue in the decade ahead. However, UK investors may be well served to pay particular attention to the below industries.

Smart mobility: By 2025, we expect the market for smart mobility to be about US$ 450bn, which is three to four times larger than today’s size. And by 2030, this could rise to about US$ 2tr. This growth will be driven by smart mobility’s role in helping to address climate change, as well as the regulatory environment, and technological and cost advances.

Automation and Robotics: We believe automation companies will be among the long-term winners in the aftermath of the pandemic. Demographic changes, rising labour costs, the drive for productivity gains, and rising digitalisation all will support this theme. 
Given the cyclical nature of the theme, we expect it to offer opportunities for investors with shorter, more tactical horizons over the coming year.

By 2025, we expect the market for smart mobility to be about US$ 450bn, which is three to four times larger than today’s size. And by 2030, this could rise to about US$ 2tr

Digital assets: Digital assets have garnered significant media attention in recent years as Bitcoin and NFTs (Non-Fungible Tokens) have broken new price records. But if we think of the nascent distributed ledger (DLT) technology as an iceberg, the likes of Bitcoin and NFTs only represent the visible tip; we think many of the most interesting aspects lie under the surface.

As the FTSE 100 has a relatively low exposure to technology stocks, the above themes should be a key consideration of investors looking to benefit from sector growth over the coming years.

UBS Wealth - Caroline Simmons

Caroline Simmons

UK Chief Investment Officer at UBS Global Wealth Management

Important information

The investment strategy and financial planning explanations of this piece are for informational purposes only, may represent only one view, 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 and financial planning 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.

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