In this blog we highlight some key thoughts from the Schroders Investment Conference which took place on 7 June 2016. These are the opinions of Schroders and not an endorsement of what they said.
In this part of the conference Stuart Podmore, Investment Propositions Director, outlined some thoughts.
In recent research they carried out they have identified that investors are looking to maximise returns with the lowest levels of volatility. Effectively investors are demanding value and it is in this environment that products must be developed to respond.
There are three binary events this year which will have an impact on markets:
- BREXIT – June 23
- US Presidential Elections – November 8
- US Monetary Policy – June and December
The BREXIT campaign is being driven by emotion rather than facts and statistics, and this means it is very hard to predict the outcome. Younger voters rushed to register in the last few days of registration and whether this will have an impact is widely unknown.
The betting markets are thought to be a better guide as to the potential outcome, and at one point showed 85/15 for remaining however in recent days this has changed to 75/25 and is expected to change further again. Interestingly the 25% chance is the same as Donald Trump becoming US president but Clinton will need to make concessions to win over voters.
Globally there are concerns on China, Inflation and Monetary Policy. In China there is a slowdown in manufacturing but this is flowing into other more domestic focused areas. Inflationary pressures are building with both wage increases and a rise in oil prices. Turning to monetary policy although the US seems to be the focus Japan and the EU are equally as important.
In all of this uncertainty/volatility there are opportunities both in Emerging Markets/Asia and within value stocks. But equally investors are seeking products which protect them from volatility and deliver positive returns.
In the second update we heard from Gavin Marriott who is the Product Manager on the Global and International Equities Team. He started by explaining that US earnings had been pretty static for the past 2 to 3 years. They are already seeing companies beat expectations and we could see 2017 as a year where the markets reflect this and therefore surprise investors with outperformance.
Investors however, need to be careful as parts of the market are overvalued. There are opportunities to be found in oil and gas, and financials. But it is not just about the US, they are starting to have greater confidence for opportunities in Emerging Markets.
Turning to the UK, Alex Breese (Manager of the Schroder UK Equity Fund) spoke about the main concern which is BREXIT. There is uncertainty as to the outcome but the belief is that we will remain.
Ultimately a vote to leave will hit the pound in our pockets. There are stocks which have particular exposure (domestic focused like Lloyds) but a lot of this fear has been priced in, however in the run up to the vote we will see further falls.
If we leave there are three main risks:
- Sterling is likely to weaken further which could lead to inflation
- Increased regulatory, political and market uncertainty
- Weaker UK economy leading to possible recession and stock market falls
A weaker sterling will benefit consumer staples; pharmaceuticals, software and food retail but could damage house builders, general retailers, real estate and domestic banks.
Away from BREXIT it appears difficult to make a strong argument for the UK, but below the surface there are some interesting ideas and volatility is providing opportunities. Even with value coming forward care needs to be taken as it is focused in just a few sectors.
In this section of the conference we heard from James Sym who is the manager of the Schroder European Alpha Income Fund and the Schroder European Alpha Plus Fund. He started by outlining that 94% of government bonds will make a loss and therefore only equities can offer investors an income.
His view is that Europe seems cheap compared to the US and additionally he feels that the economic outlook is better, as well as company earnings. But as others have indicated it is about being in the right place. He argued that over the last ten years’ value has been out of favour and this in part has been due to low inflation and zero interest rates.
There are however signs that inflation is creeping back; core inflation in the US is 2% and James believes this will benefit value stocks. As an example staples are 20% overvalued and banks 50% undervalued. He added that every large European fund is growth-orientated whereas his fund is value-orientated in the belief that this is where returns will come moving forward.
UK Small Cap
In this part of the conference Stephanie Madgett discussed UK Small Cap. She started by explaining that at the moment small cap has bigger discounts priced in compared to medium and large cap. Much of this has been caused by the uncertainty with BREXIT and Stephanie believes the sector will be hit in the run up to the referendum, opening up more opportunities.
If there is a vote to leave they expect small and mid-cap to suffer further but a vote to stay in would see a re-rating in stocks. Stephanie added that there are good companies in this area for example Fevertree is taking market share from the dominant players and several strong IPOs (Hotel Chocolat, Motorpoint etc).
Away from BREXIT the other risks are a UK consumer slowdown and there are pockets of over-valuation.
In the penultimate speech Richard Sennitt, manager of the Schroder Asian Income Fund, Pacific Equity and Global Small Cap Equity accounts and co-manager of Schroder Asian Income Maximiser discussed the outlook for Asia.
The main focus was on China where we are seeing a shift from manufacturing to services. There are challenges as China is doing something that the US did over 100 years, in less than 10 years. This has made it difficult to allocate resources correctly and redistribute jobs from the old economy to the new economy.
Despite all the negative noise, rebalancing is taking place in China and the service sector is growing.
Across Asia many economies are in good shape with trade surpluses and for yield there is a more even spread of opportunities compared to the UK and other western economies. He did add that one area of concern is Malaysia.
In the final talk we heard from Michael Scott who is a Portfolio Manager on the UK credit desk. His view is that global growth is slowing but not in a recession. He accepts there are challenges in fixed interest but believes the opportunities remain in some areas. In particular, high yield is one area where a slow growth/low inflation environment will benefit investors.
Defaults in some areas are picking up but it is about avoiding these areas. So for example energy high yield in the US is one to avoid. Also high yield in Europe pays a lower yield but overall carries less risk than the US.
He believes that moving forward high yield can continue to deliver single digit positive returns.
Note: This is written based on the views shared by Schroders in June 2016, they do not necessarily represent our views. The reader should accept that by its very nature many of the points are subjective and opinions of Schroders. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this summary must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.