Asset Allocation in focus

Asset Allocation Focus in Spring 2019

 

Fixed Income

UK Government Bonds - conventional gilts

 

With inflation risk and possible interest rate hikes later this year we see significant duration risk and would remain short dated.

UK Corporate Bonds

 

Given the uncertain economic outlook, we see current spreads as offering little value with little downside protection.

UK Government Bonds - Index linked gilts

 

We have a preference for the protection from inflation afforded by index linked gilts.


Equities
 

Materials

 

We see Chinese stimulus during 2019 as likely. Commodity markets could be a key beneficiary and rally this year. Dividend attractions also support our positive stance.

Consumer Staples 

 

We like this sector for its defensive qualities, with some valuations now offering buying opportunities.

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, Insurance & Property

 

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

Banks 

 

Prefer globally exposed banks to domestic, look for beneficiaries of rising rates. 

 

UK Property

 

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

Life insurance

 

Supportive demographics, particularly internationally, however the sector is vulnerable to set backs to investment markets.

Health Care 

 

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

Industrials

 

Valuations starting to look more reasonable following the correction but watch out for value traps eg. low PE cyclicals.

Energy

 

Demand/supply dynamics should become 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 unlikley to move considerably from current level. Upgraded to neutral.

Alternatives

Absolute Return

 

The sector may provide downside protection but this can come with high fees and little transparency.

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