Investors concerned about ever soaring inflation are being encouraged by fund buyers to look to unloved UK equities as a source of possible refuge.
The recent announcement that US inflation surged to 7.5% in January, its highest level of 40 years, saw a large sell off in growth stocks, while US 10-year treasuries went through 2%.
With US interest rates now expected to rise in March, and increase faster than expected in an attempt to curb rising prices before they do lasting damage to US economy, Darius McDermott, managing director of Fund Calibre, said there is nothing in the data to suggest inflation is slowing down.
“Inflation this high does make investing easy,” he said. “The one glimmer of light is actually the UK, where our much unloved stock market has more of a value tilt and has actually started to outperform its peers in recent weeks.”
Indeed, since 1 December 2021 to 9 February 2022, with a return of 8.3%, the UK is the only major stock market to make significant gains this year.
Trends to continue
Given that the major constituents in the UK are big oil, banks and pharmaceuticals, Chris Metcalfe, managing director of Iboss, said it would be little surprise to see the current market trend continue given the macroeconomic backdrop and expected global monetary policy.
“Higher interest rates are good for bank profits,” Metcalfe says. “Since most of the world’s banks have had to live with low rates for years, this makes the outlook for the sector better than at any time since the global financial crisis.”
He added: “In particular, the UK, which has a significant amount of banks and other financials within the FTSE 100, looks to be well placed to capitalise on the new world of higher rates.”
For McDermott, those looking to invest money at the moment have two quite binary choices, depending on their personal outlook.
“They could either choose to invest in a value-orientated funds such as Schroder Recovery or Ninety One Special Situations, or top up on quality growth stocks that have fallen to much more attractive valuation levels. In the case of growth, he noted they could pick funds such as Baillie Gifford Global Discovery or Rathbone Global Opportunities.
“There is one final option though,” he added. “Investing in real assets, which tend to hold their prices better in inflationary periods. VT Gravis Infrastructure Income is an example, as it has a good yield and invests in real assets with inflation protection. REITs are another example, and trusts in this space such as TR Property.”
Adviser conversations
Metcalfe said in the conversations Iboss has been having with advisers, he has noticed that there have been two noticeable changes in client concerns so far in 2022.
“Firstly, some clients are asking about performance, but unlike last year when it was about comparisons with American markets and particular technology stocks, it now comparisons with the FTSE 100,” he said.
It’s been well documented that for the past number of years investors have been well rewarded for holding an increasing amount of US tech stocks and growth assets.
Metcalfe noted these “momentum-fulled” assets have become progressively more speculative, particularly over the last three years.
“Investors moved from purely FAANG, which made extremely healthy profits, to smaller low/no earning technologies and crypto with a rationale not dissimilar to 1999,” he said. “The considerable losses in many of these assets have had clients re-evaluating what success looks like.”
Inflation concerns
The second new concern from advisers that Metcalfe has noticed is whether or not their investments will beat inflation?
“This is tricky to answer because it will depend on the timeline and the government and not very independent central bank reaction functions to the inflation data,” he said. “The outcome will vary from country to country, and politics and the election cycles are likely to play an important part.”
Another essential element, he added, will be energy prices and, in particular, the oil price. Owing to some naive energy policies enacted over the last decade, Metcalfe said governments have made another “rod for their own backs”.
“There is no quick fix to the energy crisis, but at least many leaders are having more realistic conversations about the possible options,” he said. “As with inflation, just hoping a situation will rectify itself is, in the end, untenable and the longer the delay before facing the facts, then the more drastic the eventual response has to be.”
