News

In our view, asset price performance year-to-date has been primarily driven by three main investment themes.

The first of these is falling bond yields. We believe bond yields have fallen primarily as a result of weaker than expected first quarter GDP growth in the US, largely due to poor weather, and that GDP growth will soon start to pick up. Additional factors include the impact of efforts of central bankers to reassure markets they will not suddenly or aggressively raise interest rates - a position that is supported by low inflation.

The second theme is the rotation of equity holdings away from ‘cyclical stocks’ (whose earnings rise and fall with the economic cycle) into ‘defensive stocks’ (which have steady and stable earnings growth). With regard to defensives, we feel that the drivers have been pretty similar to those noted above. Defensive equities typically have steady cash flows making them bond-like in nature, so lower yields make their earnings and dividend yields more attractive which has resulted in their valuations being driven higher.

We expect both of these themes to reverse as economic growth picks up, so we are unlikely to adjust our portfolio positions as a result of these moves.

The third theme has been the outperformance of large companies against small and mid-sized companies. Here we feel compelled to reduce the size of our very large overweight position in small and mid-sized companies, which have significantly outperformed over several years. Whilst reducing the size of the position we will remain overweight as longer term they remain attractive. They have greater capacity than large companies to make material structural change, to take advantage of and develop new markets and more opportunities to gain market share.

We will use the funds to raise our weightings to large companies. Specifically, we currently see an opportunity in the Oil and Gas sector, which is dominated by a small number of very large global companies. In this sector, ‘price-to-earnings’ ratios are below the market’s average and low earnings growth is anticipated, which has led to relatively cheap valuations. We think these forecasts will prove too conservative as lower capital spending and more efficient use of capital leads to improving profitability. Another positive driver could be higher demand as global growth picks up. As a result we are raising the weightings to this theme in equity portfolios.