David Hambidge
Investment Director of Premier Miton’s Multi-Manager Funds
David Hambidge, Investment Director of Premier Miton’s Multi-Manager Funds sees opportunities for cautious asset allocators in 2023, but not without potential investment headwinds.
A pleasant surprise
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
Like many, we have been pleasantly surprised at how risk assets have performed since the start of the year with both equities and bonds producing healthy returns. This comes on the back of a strong fourth quarter for both asset classes with the resilience in markets seen because of China’s reopening and a range of economic data that has surprised on the upside. This relatively positive data includes inflation which continues to fall (although remains stubbornly high in the UK) as well as data on wages which appear to be relatively well contained.
However, the battle against inflation is a long way from being won and the US Federal Reserve and other central banks have made it abundantly clear that they will continue to raise interest rates until there is strong evidence that prices are under control.
Considering risk v reward
Against that backdrop we continue to adopt a relatively cautious approach in our multi-asset funds with an emphasis on those areas which we feel offer the best relative value. Within equities that includes the UK which still appears cheap despite last year’s outperformance of global markets, while we remain underweight the US with the S&P 500 looking vulnerable due to its high allocation of expensive looking tech stocks.
Elsewhere, the rout in fixed income last year has resulted in large parts of the government and corporate bond market moving from being uninvestible in our view to relatively attractive with yields in the fourth quarter higher than they have been for over a decade.
Encouragingly, many companies appear to have taken advantage of the ultra-low interest rates available post the Covid pandemic to lock in financing at very attractive rates. As a result, we believe that while we will see a increase in corporate defaults in the next year or two, this will be from a very low base and should not be enough to derail what looks to have become an attractive investment opportunity.
For us, investment grade corporate bonds appear to offer the best risk/reward opportunities and while the asset class is not as cheap as it was last autumn to us, the yields on offer still look attractive assuming inflation continues to fall.
Sterling Corporate Bonds – rolling 12-month returns %
Source: Bloomberg data to 30.12.2022
Plain sailing ahead? Maybe not
Apart from bonds, one of the biggest casualties of higher interest rates last year was commercial property where prices, having held up remarkably well for the first half of 2022, fell sharply in the second half. This was particularly true in the UK with investors less than impressed with September’s so called ‘mini budget’.
In our view there has been a degree of the baby having been thrown out with the bath water in the commercial property space and we have been selectively adding to our positions that are not too economically sensitive, with the yields on offer now looking very attractive we believe.
In summary, while this year will be far from plain sailing as far as the markets are concerned, there is no doubt that there are far more opportunities to be exploited in the multi-asset world than there have been for many years. Long may that continue.
