Inflation risk is top of the agenda, but investors can proactively protect their portfolios by considering commodities and infrastructure - particularly if they choose specific kinds.
Managers ponder post-Brexit rebound.
Warnings over complacency provide a counter-point.
Multi-dimensional diversification the order of the day.
A broader take on technology warranted.
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 September, our expert investment views pertain to the post-Brexit “bounce” and the importance of multi-dimensional portfolio diversification are top of the investment agenda.
Nigel Cuming, Chief Investment Officer at Canaccord Genuity Wealth Management, says:
The speed at which financial markets have rallied recently has largely been in response to the latest round of central bank stimulus, but also because Brexit has become something of a short-term, non-event, as it is looking increasingly likely that the beginning of negotiations is well down the road.
However, there seems to be a degree of complacency concerning the UK economy at present and we must bear in mind that it is too early for adverse post-Brexit sentiment to show up in most economic data. There is, therefore, the potential for a few nasty economic surprises in the months ahead and a real chance that the UK could return to recession next year.
While we believe that both the global economy and global equities are capable of making some further progress this year, we have a sense of disquiet that quantitative easing and central bank monetary policy has done little to boost the real economy; instead it has simply inflated the price of equities.
Sterling has depreciated approximately 10% since the Brexit vote. Given the high level of overseas earnings generated by FTSE-listed companies, the outlook for the internationally-orientated FTSE 100 is much better than for the UK’s underlying economy.
Although European economic confidence has held up quite well in the face of Brexit, the ECB will continue to do whatever is necessary to promote economic growth and there are pockets of the European banking system which remain vulnerable as they are undercapitalised. Poor performance data recently published for Italy will also likely be a source of market volatility over the next few months.
It probably won’t be until October that clear evidence is available to measure how badly consumer and business confidence has been affected by Brexit. It is likely that the Government’s Autumn Statement in November will be the time for the announcement of more shock and awe tactics.
Chief Investment Officer at Canaccord Genuity Wealth Management
Garry White, Chief Investment Commentator at Charles Stanley, says:
Technology companies offer significant future growth potential – but the UK stock market has very few names in which to invest. The situation is about to get worse after Japanese group Softbank agreed to buy microchip designer ARM Holdings. Investors therefore need to look global for technology exposure – and collectives are the best way to do this.
Allianz Technology Trust attempts to identify future industry trends, with the high-level view guiding the team’s bottom-up analysis. The team is based in San Francisco, as it facilitates easy access to a number of the world’s top tech companies located in Silicon Valley. In theory, the approach is a global one, although this is slightly undermined by the trust’s 71% allocation to the US. It does not only invest in larger companies – so investors can get a pooled investment with exposure to relatively smaller companies. It has plenty of positions in companies of $1bn-$10bn in size, as well as big stakes in giants such as Amazon, Alphabet, Facebook and Microsoft. The trust has historically thrived when small and medium caps lead the market and has tended to lag when larger tech companies outperform.
Chief Investment Commentator at Charles Stanley
Keron Launder, Head of Investment Strategy at Cazenove Capital, says:
In a world of increasing polarisation (prominent in politics, disruptive technologies, valuations and wealth), creating a robust portfolio has become more important than ever before. Initial portfolio diversification is usually associated with high-level multi-asset ownership; however, post-Brexit market and portfolio performance was a stark reminder of the importance of currency diversification, both direct (by holding international equities) and indirect (from international earnings of large UK companies). As a result, sterling-based portfolios performed well despite the increased turbulence in markets.
While currency diversification is one aspect of portfolio construction to consider, there are other important dimensions to take into account. For instance, when investing in equities, diversification of risk factors is important, and while many think along sectoral lines, an individual corporate’s (and also sectors’) robustness and future prospects can be viewed along other diversification lines e.g. considering the breadth of product or service offering from the company; determining whether the firm (or sector) is a price-taker or price-maker and why; and reviewing the diversity of the customer base – think how different a consumer staples company is to an outsourcing company. However, even some of these levels of diversification may not be enough, as we have seen in many traditional sectors as disruptive forces have brought radical pressures to bear.
In a time of accelerating change, with many disruptive technologies and other disruptive forces to be reckoned with, future-proofing a portfolio has never been so important.
Head of Investment Strategy at Cazenove Capital
Alex Scott, Deputy Chief Investment Officer at Seven Investment Management, says:
Currency weakness means that foreign revenues are worth more in sterling terms. It’s true that the FTSE 250 has lagged the FTSE 100 since referendum day, but the rebound in both markets began surprisingly quickly and both now stand at highs for the year. It remains to be seen whether slowing UK growth curbs enthusiasm for UK mid-caps.
While this might seem like a puzzling post-Brexit bounce, we must be careful not to look at global markets through too parochial a lens. UK equities have recovered strongly, in sterling terms, but it certainly doesn’t look that way from other global financial centres: measured in US dollars or euros, UK equities are still around 20% below their highs of early 2015. Brexit uncertainty is obviously still weighing on minds: we clearly cannot say that markets aren’t worried about the risk as it applies to the UK economy. It’s just hard to see it in the market (even the FTSE 250) when we measure in devalued sterling terms.
For the rest of the world, there is further evidence that the economic expansion continues – notably the confirmation of strength in the US labour market, with healthy payroll data released in early July and August. Central banks have also confirmed that they are in a highly supportive mode which is very helpful for risky assets. Markets are responding, and investors (many still disposed to caution after the shocks of the past eight years, with high allocations to cash in portfolios) may be regaining risk appetites: flows of funds back into emerging markets suggest some confidence is returning.
Deputy Chief Investment Officer at Seven Investment Management
Lee Goggin, Co-founder of findaWEALTHMANAGER.com, says:
What a difference a few weeks makes. It seems so long ago now that Britain voted to leave the EU, but with summer holidays and the Olympic success, people’s attentions were turned elsewhere towards more pleasant thoughts and activities. It’s probably fair to say that the next few months and years might not necessarily be plain sailing. If there’s one thing markets do not like, it is uncertainty – and there is plenty of that at present. However, along with this comes opportunity, and the skill of the investment professional in these tricky times is crucial to taking advantage of these opportunities.
Looking at how the UK stock market has rebounded, I am gradually coming to the conclusion that those investors outside of Europe and perhaps some within might begin to see the UK as a safe haven. Upcoming votes in Italy plus some pressure on governments in Spain, France and the Netherlands to hold referendum – and of course the ongoing mess in Greece – are a worry. Greek issues, conveniently swept under the carpet from time to time are not going away either. It is obvious we in the UK have a lot to deal with at present, but we seem to be getting on with it.
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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.
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