Multi asset funds have the levers to navigate the macro tensions dominating markets

22 August 2022

Anthony Rayner
Premier Miton Macro Thematic Multi Asset Team

The type of tensions dominating markets are amply illustrated by two dynamics. First, UK consumer confidence, which is now the lowest on record. Second, UK interest rates, which have not long started on their journey towards approximately 3%, according to market expectations, looking to peak around the middle of next year.

Meanwhile, newsflow around industrial disputes, in large part a barometer of the cost of living crisis, is increasingly spreading from the transport sector to other areas of the economy. The UK is not an exception, even if it is more exaggerated than many other developed countries. The message is clear though: inflation is being felt across geographies, assets, central banks and political spectrums.

How can multi asset investors position for such a seemingly indiscriminate force? Part of the answer depends on the persistency of inflation. It seems fanciful to believe inflation will simply return to pre-Covid levels, as dynamics such as globalisation, which were very disinflationary, are being replaced by deglobalisation. Just as important though, is the persistency of any recession resulting from central bank action to curtail inflation. In short, it’s about positioning around the degree of stagflation risk.

We are, and always have been, reluctant to forecast markets or economies. The chances of correctly forecasting within a helpful margin of error are slim. Even less likely is the probability of forecasting how asset classes will react to a pinpoint forecast, in part as the broader context is so important. Instead, we are more comfortable to accept that economic volatility will remain elevated, and to spend more time on understanding the levers we can pull, depending on the range of most probable scenarios.

If we assume, as our base case, that inflation remains ahead of market expectations, and that recession risk is rising, that provides some insight as to how portfolios should be structured across assets. That said, an inflationary environment and a recessionary environment often apply opposing forces on assets.

Equity exposure should be reduced, with a bias to less economically sensitive sectors such as utilities, telecoms, staples and healthcare, and some exposure to inflation beneficiaries, such as resources, though recession will be an opposing force to higher resource prices via lower end demand. So, gauging which is the most powerful force of the two at any point in time, will be important.

Turning to developed market government bonds, recession risk would imply longer duration, whereas inflation and higher rates would suggest shorter duration. This tension can be seen in how yields have been zigzagging in the last few months. So, having some duration might be sensible, especially if the Fed is being overly aggressive. Also, it’s probably best not to assume that government bonds will perform their safe haven role, if inflation risk is the primary risk in markets. Again, it comes down to inflation persistency.

Emerging market bonds, meanwhile, are fascinating, with increased performance divergence, as commodity producers fare much better than commodity consumers. Meanwhile, credit risk in corporate bonds is perhaps more clearcut, with recession and higher refinancing costs suggesting a bias to better quality credit, such as investment grade.

Commodities can provide some balance to portfolios, though here too the cross currents of inflation and recession are unhelpful in deciding an aggregate stance. So, we have elected to retain our material position in gold, and we have sold our more economically sensitive areas like industrial metals and agricultural commodities. The outlook for property is also mixed, with some inflation protection but some negative impact from any recession, added to the impact of the lingering Covid lockdown to certain sectors. A lack of clarity has led us to reduce our exposure here too.

Cash is more helpful than it has been for some time, in an environment where most assets have fallen. Though, with inflation higher, the real returns look poor, even if rates have risen somewhat. So we have elevated cash, in part reflecting our more cautious view and also for investment opportunities as and when they arrive.

Just as we avoid forecasting, we don’t assume it will be a straight line to our base case. This positioning won’t all be right, it never is. The point is not to focus solely on being right or wrong. Sometimes portfolios will need tweaking, for example to emphasis the bias to inflation or recession, sometimes they will need more radical action. Nevertheless, we believe that being vigilant, holding liquid assets and utilising the full range of levers available to global multi asset investors is a good place to start.

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Risks

The value of stock market investments will fluctuate, and investors may not get back the original amount invested.

Government and corporate bonds generally offer a fixed level of interest to investors, so their value can be affected by changes in interest rates. When central bank interest rates fall, investors may be prepared to pay more for bonds and bond prices tend to rise. If interest rates rise, bonds may be less valuable to investors and their prices can fall.

Property values can rise and fall sharply depending on the strength of a country’s economy.

Alternative investments typically behave differently to traditional investments such as bonds and equities. They can include a range of assets such as specialist lending, private equity, hedge funds and gold. Adding alternative investments to a portfolio can help to make it more diverse but can also make it more volatile.

Investments made in bonds, equities or other assets in less-developed countries generally carry higher risk than in developed countries.

Equities (shares) can experience high levels of price fluctuation.

Forecasts are not reliable indicators of future returns.

IMPORTANT INFORMATION:

For Investment Professionals only. No other persons should rely on any information contained in this fund manager insight.

Whilst every effort has been made to ensure the accuracy of the information contained within this document, we regret that we cannot accept responsibility for any omissions or errors. The information given and opinions expressed are subject to change and should not be interpreted as investment advice. Reference to any particular stock or investment does not constitute a recommendation to buy or sell the stock / investment.

All data is sourced to Premier Miton unless otherwise stated. Persons who do not have professional experience in matters relating to investments should not rely on the content of this document.

For your protection, calls may be monitored and recorded for training and quality assurance purposes.

Issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227. Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

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The content of the pages of this website is for your general information only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

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The information contained on this website does not constitute an offer or solicitation to sell or purchase shares in the funds or portfolios or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

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