Peter Geikie-Cobb, Director & UK Fund Manager, offers his views on some of the larger issues across the macro-economic landscape including Brexit, Trump and monetary policy.
How are the various scenarios surrounding Brexit impacting your thinking?
We think that the UK equity market is broadly good value as a general theme, particularly the domestic sector, and offers good long term value supported by inexpensive valuation metrics. Short term volatility is likely to continue until the uncertainty over Brexit is removed. However, this should be viewed as an excellent opportunity for market entry and exit points.
What is fair value for the pound and how do you reflect this in your portfolios?
1.50 vs USD and 1.30 vs EUR is fair value on a Purchasing Power Parity basis and represents the level of GBP prior to Brexit. While there might be some further short term downside from here, on an 18 month view we would expect GBP to return close to fair value as the economy and sentiment settles down following a Brexit resolution.
Fiscal policy globally remains loose; for how much longer can central banks continue to offer support?
Central banks will continue to provide support, particularly the Fed which remains concerned about financial stability in a less transparent system. Fiscal stimulus will be needed to fuel demand into the real economy. Quantitative Easing has largely benefitted only asset prices.
Can you explain the shape of the yield curve, and what it is suggesting?
Yield curves in the major markets are implying a slowdown in economic growth but not a deep recession. However, over 12-18 months we expect curves to steepen as fiscal expansion gains traction.
Donald Trump is rarely out of the news; does it come in to your thinking when managing the portfolio?
To a limited extent. Yes, trade wars are hanging over economic sentiment but central banks are focused on maintaining financial stability and this requires low interest rates and an abundance of liquidity at the risk of inflation and this is the current key driver for markets. With nominal and real bond yields both being negative there is little alternative but to commit considered capital to equity markets.
If bonds and cash offer very little / negative returns, how can you create a well balanced portfolio?
A balance of value equities with the prospect of decent dividend growth combined with genuine growth themes such as technology, ethical and responsible investments (a theme we think will get increasing attention), will provide a better risk/reward outturn than owning long duration assets in the bond market. In addition, we would rather own credit risk in the equity market than in the bond market.
Where are you finding the most attractive opportunities for the medium term?
Areas of particular interest in equity markets at the moment include UK (particularly domestic earners and listed property stocks), Japan and other Asian and emerging markets. We believe the US to look fully valued. Over the medium term we are positive on ‘risk’ assets but active management will be required to take advantage of extreme valuations both on the upside and downside.
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