Multi-Asset Investment Update | August 2017

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  • 08 mins 26 secs
Barry Widdows, Head of Multi-Asset Portfolio Management, Prudential Portfolio Management Group, discusses high valuations and political risk in 2017, changes in key market themes in the last quarter, how Brexit negotiations are affecting sterling and UK assets, and what the investment activity there has been in the portfolio.

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PRESENTER: For the latest update from the Prudential Portfolio Management Group, I’m joined by Barry Widdows who’s the Head of Multi-Asset Portfolio Management – Barry, good to have you with us today. So against a backdrop of high valuations and political risks, how would you say the year’s been so far?

BARRY WIDDOWS: Well yes I suppose 2017 so far has been actually a pretty good year for multi-asset investors, I think. You know, we’ve seen some reasonable returns from risky assets, in particular equities. Bonds have also produced a positive return despite a backdrop of the removal of quantitative easing and potential of monetary policy hikes. And we’ve also been in this environment with pretty low volatility and where correlations between major asset classes have been negative or continued low. So what we’ve had as a long-only multi-asset investor is a period where we can produce some pretty good risk-adjusted returns.

PRESENTER: And what have been the key themes in markets since you were last in here for your update?

BARRY WIDDOWS: Yes, I think there’s been a couple of themes that have really been driving markets last couple of months, so the first is earnings and I suppose the other one is monetary policy. So on the earnings front we’re just coming to the end of the earning seasons in both the US and Europe, and in US we’ve seen over 5% sales growth and around 10% earnings growth, where both of those are better than expected. I think some of that is really due to the expected rebound in oil and gas sector, but there was also some unexpected strong growth in a tech sector so that was really driving the earnings there. And then in Europe, we’ve also seen about 20% earnings growth, and that was really again much better than expected and particularly impressive against the backdrop of the really strong euro at the moment which has been a headwind on corporate earnings, so really with earnings providing a good backdrop for markets there.

And what have markets done? Well, in the UK, equities have been up 3½% in Q2. In Q3 so far they’re pretty flat, but over the year to date has been pretty good result. If you look across the US, the S&P’s up 2.6% in Q2, although in sterling terms you’d have actually lost a bit of money due to the weakness of the dollar. And again in Q3 returns have been pretty benign so far. But in general returns year-to-date have been OK. Moving across to bond markets, what we saw in late June was a pretty big selloff in yields, and that was really caused by some hawkish chatter out of the central banks in both Europe and the UK. And so that certainly dampened returns from bonds in the end of the first half but in Q3 what we’ve seen in those yields tighten again and prices rally as some of the weak data has come out of particularly the US and the UK, and the prospect for interest rate rises has been weakened a little bit. So again we’ve seen some decent returns in a recent period.

PRESENTER: So all things considered how is your portfolio positioned at present?

BARRY WIDDOWS: So I’d split that into a couple of questions, I guess. So firstly on the strategic side our sort of longer-term positioning and then on the shorter-term tactical side. So thinking strategically first what we try to do is build our portfolios to really have an optimal asset allocation based on our long-term views of the prospects of the various asset classes. And what we’ve been doing there recently is really continuing a theme of diversification. So we’ve been adding some exposure into alternatives. So moving away from traditional asset classes into alternatives and particularly private equity where we see the prospects of capturing a structural risk premium, and in the US private equity in particular we see some compelling valuations relative to public equity markets. Also on the property side we’ve been diversifying, adding to our overseas exposure, and that’s really about again moving a portfolio up the efficient frontier to get better returns for our clients. And then moving shorter term on the sort of tactical views, well, we tend to look at three themes. So firstly macro fundamental type indicators, secondly valuation and thirdly on the sort of sentiment behavioural shorter-term indicators.

Certainly on the macro side we’ve been pretty constructive and remain pretty constructive. So throughout the first half we were long equities and that proved to be beneficial. Recently, we’ve actually tempered that view slightly. We’ve seen a deterioration in some of our sentiment, our proprietary sentiment indicators, and that led us to take that position off recently so we’re more neutral now. Well I’d say we remain cautiously optimistic and we’d probably look to add some exposure if there was a market selloff. Also on the macro side, I think, you know, we think there’s a prospect for US inflation to pick up more than the market currently anticipates, and really that’s driven by the tight labour market that we see there at the moment and the prospect for earnings pressure to feed through into core inflation. You’ve also in the US got the possibility that some of the Trump policies could come through on fiscal policy or protectionism and that could, again, add to inflation pressures. So we like the risk return prospects of that trade. And then I guess turning to valuation, we’re also tilted towards the sort of late cycle markets where we see more value, so in particular in equities in Asia, emerging markets, Japan, for example.

PRESENTER: And here in the UK I mean we’ve got this ongoing uncertainty caused by Brexit negotiations. What’s your view on things like sterling and indeed UK assets?

BARRY WIDDOWS: Yes so I think sterling, we certainly don’t have a strong view on sterling aside from the fact that we expect further volatility as you get this ongoing information coming from the negotiations on the Brexit issue. So we’ll see some volatility there. I think on UK assets, we’re perhaps more sanguine. You know, if we do get bad news out of the Brexit negotiations, what you’ll see is a sterling selloff and that can provide a natural hedge to some of the sterling assets. So for example in UK equities certainly bad Brexit news could be poor for the underlying asset but the weaker sterling would then give you a benefit from the translation into earnings. Likewise in property you’d see more demand coming through from overseas investors if sterling was weak from bad Brexit news. So we have some natural hedge built in there that leaves us a little bit more sanguine about the prospects for UK assets.

PRESENTER: And what other investment activity have you been doing in the portfolio?

BARRY WIDDOWS: Yes I think another theme and related to what we talked about earlier was really trying to add more private assets into the portfolio. So another area we’re adding exposure is into private fixed income or alternative credit. And this is really about getting exposure to pools of loans that are asset backed and highly secure but can provide an extra return source, an attractive return source for the portfolio and some correlation benefit. So we’re really trying to add exposure there, because we think it makes sense for our clients, and the strength of the fund allows us to bid for those types of assets in the marketplace, which not many people can do.

PRESENTER: And how do you see the rest of then 2017 playing out?

BARRY WIDDOWS: Well I think 2017 really I expect more of the same frankly before the end of the year. I don’t see an immediate catalyst for the current themes to change. I think we’re going to continue with equities to potentially grind higher. I think rates markets will remain sensitive to monetary policy, news and inflation. And I think you’ll also see the political risk continuing to cause short-term drawdowns and increase volatility, and of course Brexit will be the main theme in UK and Europe, and you’ve always got in the US the wildcard of Trump.

PRESENTER: Barry, thank you.

BARRY WIDDOWS: Thank you.