Asset Allocation in focus

Asset Allocation Focus in Autumn 2019

As part of our focus on providing a high quality, personalised investment service, we look to support our investment managers in their decision making when it comes to constructing client portfolios.

Our asset allocation committee is one example of this, via their monthly output showcasing their views on a global basis; this is then complemented by a sectoral view from the stock selection committee. The combination of these top down and bottom up opinions is an important resource for our investment managers to validate their own investment theses or to generate new investment ideas. 

These committees, which consist of members of our research team and a number of investment managers, aim to provide a view that seems most suitable in the current climate. The output of the monthly meetings remains a suggested stance and it is important to note, that the views expressed are those of the committees and may not necessarily be those of your individual investment manager. 

Here we present a snapshot of the current views.

SECTOR VIEWS

Materials

We turn more cautious following a strong first half of 2019 as macro economic indicators suggest global economy stuttering. Dividend attractions remain however and balance sheets are not stretched.

Consumer
Staples

We like the sector for its defensive attributes and high quality businesses. However, we are wary of valuations and the sector’s vulnerability to higher inflation on margins.

Consumer
Discretionary

Focus on the disrupting companies and high quality brands. Structural growth and rising wages should support the sector. Note Amazon represents 15% of this sector.

Financials
ex Banks, Life Insurance, Property

This includes a broad range of stocks which are generally geared to investment markets. Valuations now reflect the cautious lower growth outlook.

Financials
Banks

Uncertain domestic outlook, falling interest rates globally and a stuttering economy make us reluctant to add to this sector. We recently downgraded from neutral to underweight.

Financials
Property

Some discounts in the UK are at historically wide levels however caution on Brexit uncertainty and structural trends impacting High Street.

Financials
Life Insurance

Supportive demographics, particularly internationally, however valuations appear fair value.

Financials
Real Estate

Global real estate may offer better value but again caution on bond proxy status.

Health Care 

Growth and defensive attributes and global demographic tailwind. Distinguish between pharma/healthcare/biotech sub sectors. Key theme for medium term.

Industrials

Valuations look more reasonable following the correction in 2018 but watch out for value traps eg. low P/E cyclicals.

Energy

Demand/supply dynamics are becoming more favourable as year progresses. Dividends sustainable with oil at current levels and valuations appear attractive.

Information Technology

Traditional tech firms - Apple, Microsoft (make up 24%) with Visa, Intel, Cisco - be selective.

Communication Services

New restructured sector - Alphabet, Facebook, Netflix, Tencent (make up 30%) included with Verizon, AT&T, Disney and Comcast - be selective.

Utilities

Valuations now reflecting political uncertainty in UK. UK interest rates unlikely to move considerably from current level.

 

UK EQUITIES

UK

 

Heightened political risk means that we expect near term volatility, however we remain overweight and see continued opportunity from both high quality domestic names and overseas earners. Sterling continues to offer attractive prices for UK assets to opportunistic international buyers. 

 

INTERNATIONAL EQUITIES

North America

 

Remains in a fundamentally sound economic position which includes reasonable growth, low unemployment, real wage inflation and a more dovish Fed. That being said we are wary around escalating trade war rhetoric which could hold further near term risk. 

Europe

 

Given longer term structural concerns (such as political risk, high unemployment, north/ south divide persist), we remain underweight.

Japan

 

Long-term structural concerns similar to those in Europe continue to inhibit domestic economic growth. The discord between accommodative monetary policy and contradictory fiscal policy, particularly October’s consumption tax hike, is likely to dampen any near-term rerating case. We maintain a neutral rating underpinned by our muted conviction for significant Chinese reflationary stimulus (a key export partner) in 2019.

Asia Pacific

 

We are concerned around the risk of escalating trade wars and hold a lower conviction on our expectation for significant Chinese stimulus during 2019. Whilst we continue to see it in the interest of both parties (the US and China) to agree a trade truce, we would ascribe a low likelihood of a near term resolution and so see it prudent to downgrade our recommendation to neutral. 

Emerging Markets

 

As for Asia Pacific, we are concerned around the risk of escalating trade wars and hold a lower conviction on our expectation for significant Chinese stimulus during 2019.

 

BONDS

Conventional

 

We continue to see longer term upside risk to inflation and interest rates and so remain underweight and short duration.

Corporate

 

Despite a rosier economic outlook, we see current spreads as offering little value with little downside protection. 

Index Linked

 

With the threat of inflation globally we like the protection afforded by index linked gilts. However we would be wary on valuations here and would be selective in exposure.

 

CASH

Cash

 

Given current market volatility, we are happy with both the cautious positioning and the optionality that a slightly higher cash weighting affords.

 

PROPERTY

Property

 

Structural challenges, Brexit concerns and the risk of higher inflation and interest rates means we remain underweight the sector. That being said we would consider some bottom up opportunities where earnings driven business models should act more like an index linked bond.

 

ALTERNATIVES

Alternatives

 

Alternatives Bottom up selection is key in this heterogenous sector. With the threat of higher inflation going into the next downturn, we would highlight Infrastructure and Gold as potentially better diversifiers than Cash or Conventional Fixed Income.

 

 

 

 
 
 
 
 

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