Prudential Market Insights | December 2019

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  • 06 mins 00 secs
Given the heightened level of political risk, should portfolio management styles be adjusted to suit the market? Phil Butler, Multi-Asset Portfolio Manager, M&G Treasury and Investment Office, gives his outlook for 2020 and his thoughts on 2019.


Multi-Asset Hub
Mark Colegate: With his outlook for 2020 and his thoughts on 2019. I'm joined down the line by Phil Butler. He's a multi-asset portfolio manager at the M and G Treasury and Investment office. Well Phil, given the heightened level of political risk that's out there at the moment, are you tempted to change your portfolio management style?

Phil Butler: Yeah. Thank you, Mark. No. Ultimately, we always say around these political events that we don't change our style. We're long term investors. We try and create a diversified portfolio that allows us to ride these so-called bumps. And if we look about what political events there are at the moment, we've got, obviously, the UK general election around the corner. Hopefully an independent Brexit in terms of depending how the votes go. We have a U. S. Presidential election next year, and there's obviously been political issues in South America. So, trying to navigate through these, we keep a keen eye on what's developing and ensure that our portfolio decisions take into account those developments and changes.
Mark Colegate: As a multi asset manager. What sort of 2019 have you had?

Phil Butler: As a multi-asset Investor 2019 as the calendar year has been very, very good, low risk funds you could have received anything between 9 - 10% on your returns, at a high risk endure looking towards 12 - 13%. So, a great year for our underlying clients. Now, when you bear in mind the fact that in Q4 2018 was less of a good year. Those sort of normalized one-year numbers are looking healthy on our sort of long-term sort of schedule of around 4% to 7% for advisers. We've been benefitting in the fact that our asset classes have been correlated in all given, and positive gains across the board. So, yeah, on the whole very good year,

Mark Colegate: How would you summarize asset class performance over 2019 and give us your thoughts for 2020? I mean, that's a big question. So, let's break down and have a little look of equities first.

Phil Butler: Yeah, equities have had a very good year in sterling terms, and the U. S market has done over 20% so that has been a great benefit to our portfolio. UK markets have also done well. There's been a little more certainty around on the government's direction when we try to look at equities and break it down a little bit. Actually, a lot of that benefit has come through a re-rating. So, you think about the earnings and dividends impact of those returns have been slightly lower than historic norms that should be into that re racing. So, it’ll be interesting to see how they go into 2020. Will those companies be able to continue to give those earnings and the growth that the market wants, will they still continue to get that, that's the big question.

Mark Colegate: And what about fixed income?

Phil Butler: Yeah, in fixed income, so in 2019 central banks around the globe have been great at adding stimulus into the market. So, what we've seen is yields fall, credit spreads have narrowed marginally through the course the year. This means if you're in government bonds or if you're in the corporate bond sector, what you've seen is good, positive yielding assets. Now, lots has been spoken about how in Europe, for instance, there's a lot of negative yielding assets. So, as we go into 2020 it's gonna be interesting to see how they develop and whether or not in the long term they're still an attractive asset class to the market itself, clearly, with the European Central Bank doing quantitative easing again that there's clearly a supply demand dynamic mismatch.

Mark Colegate: And those are the two major asset classes. But where does that leave alternatives, including property?

Phil Butler: Yeah, again, I mean, alternatives had another great year in 2019. So, if we look back to 2018, they were one of the two asset classes in our portfolios that had above zero returns. So, for them to be able to give double digit returns to the second year in a row, it's great for our portfolios. It's a reason that we want to keep them in there. And we do think it's a slight differentiator compared to some of our competitors. Now, when we think about property, properties have a harder time, especially in the UK, so the political uncertainty, the overhang of Brexit. We're seeing this shift in the market towards industrial, so you think of your big Amazons, warehouses and then away from the UK Retail. So, properties had a challenging market. The positives are we're seeing that the ability to get rental growth and income is still there, so going forward we still expect to see 4% - 5% in the UK space but clearly the capital elements of the value of the property is harder to maintain through this period. However, hopefully we're getting towards the end of that. I guess the final thing to say on the property element is opposite in some of our portfolios we have geographic diversity, so exposure to Europe, US and Asia that aids the returns in that space.

Mark Colegate: So, bringing some of these themes together how your portfolios positioned today for the months ahead?

Phil Butler: Yeah, it's a great question. were conservatively constructive on economic growth globally, we think the probability of a global recession next year is low. So therefore, we wanna be mildly risk on. So, we've got exposures, overweight exposures to sort of, global equities across the boards. We also have an overweight to our alternative assets. Where we, again, we're seeing strong returns. Now if we look on the underweight side, we do have a slight underweight to UK property in general view of the market in direction of the politics there and then fixed income space were slightly underweight to UK and European investment grade. We see that as a spread to type versus historic norms and yields are quite low. So, we see that as a good way to diversify our risk exposure and look to take opportunities if they arise in the coming months.

Mark Colegate: We have to leave it there. Phil Butler Thank you very much for joining us.

Phil Butler: Thank you.

Mark Colegate: And Thank you for watching. Do keep an eye out for more multi-asset updates and insights on asset TV. From all of us here, goodbye for now.