Chris Leyland, True Potential Director Of Investment Strategy, looks back on the key themes around the True Potential Portfolios over the past month.
As part of our commitment to transparency, we always share the rationale behind the decisions we make when managing the True Potential Portfolios.
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Geopolitical events have dominated thinking, Russia’s war with Ukraine. It is important we recognise the tragic humanitarian cost of this event, before considering any effect on asset prices.
The landscape is shifting quickly, and we are continually assessing the construction of the portfolios. The True Potential manager cohort are analysing events, assessing opportunities, and providing insight. Each fund held in the portfolios is actively managed to deliver strong risk-adjusted returns over the long term for our clients.
We have seen moves adapting to the environment of higher commodity and energy costs partly by increasing holdings in infrastructure and precious metals including gold.
Key examples of position changes:
Allianz – reduced total equity content across developed markets, increasing cash held for future deployment. Added to Brazilian equities from Emerging Market equities.
UBS – reduced US and European equity positions with proceeds placed into cash.
Growth Aligned – Increased exposure to alternative assets through currency funds, market trend funds and gold.
SEI – tactically reduced equity
Goldman Sachs Balanced – rotation of equity market exposure away from growth and into value related styles. Volatility management in near term by taking some equity profit.
Schroder – Added to gold
Close – have added to several Canadian energy companies
Taking all above into account our portfolios are positioned with the following factors in mind. However, given the fast-moving situation in Ukraine we remain vigilant and agile should we need to adjust our thinking.
– Economic growth to moderate faster than initial expectations.
– Global Inflation to remain persistent for longer, due to higher mortgage and rents in the US and energy costs intensified by the Russia/Ukraine conflict. The latter having a greater risk to Europe than the US/UK. We do anticipate more moderate headline levels as we move closer to the end of the year.
– Developed market central banks are at varying stages of normalising monetary policy. This is required to tackle inflation. China is the exception to this, looking to ease monetary policy to stimulate the economy.
– We favour equities less sensitive to higher interest rates.
– Covid-19 will become less of a concern for governments, citizens, and employers in the West as the vaccination/booster programme continues. The evolution of a new variant, and the effect China’s zero-Covid policy on manufacturing requires monitoring.
– Within fixed income, we are watching central bank policies and the effect on the bond markets. In a rising yield environment, we favour shorter duration, less sensitive to higher rates, but still hold longer-dated issues for risk mitigation purposes.
– Alternative assets have worked well in 2022 providing genuine diversification within the proposition, an asset class we continue to favour.
Inflation is expected to remain higher for longer than expected back in 2021. As we move through this year we believe the more cyclical components of inflation will moderate with improvement and repositioning of supply chains. Taking the US as an example, year-end US CPI is forecast to be 5.0% according to Bloomberg forecasts, down from 7.9% year on year in February. The Baltic Dry Shipping Index, an indicator of shipping costs, is down more than 20% from its October ’21 peak but up from its February trough.
Over the longer term, the disinflationary forces of de-unionisation and technology remain. Traditionally, globalisation has been a disinflationary force. This may be less so in the future, as countries look for supply and energy security by localising supply chains but not at any cost.
In developed markets, monetary policy tightening is only just underway even in the face of European conflict. In the US currently, markets are pricing in 8 hikes in 7 meetings with interest rates predicted to be at 2.4% in February 2023. The Bank of England has raised rates to 0.75% with rates expected to be at 2% at the end of the year and the ECB has pivoted towards a more hawkish stance with rates expected to be 0.75% higher at the end of the year. Policies are ‘data dependent’ giving central banks policy flexibility which is to be welcomed as they seek to bring inflation levels closer to their declared targets.
Economic growth will continue with expectations being adjusted due to world events. Against this backdrop there is evidence of wage growth particularly in the US, high employment and healthy savings levels. Corporate earnings in this environment reported and forward looking remain robust.
In conclusion, we believe we are positioned well in the current environment. Diversification is paramount and through the True Potential Portfolios you have this by asset class, region, but also by manager style.
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