Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.
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The world may be in the midst of an almost-unprecedented demand and supply shock, but investors’ preference for remaining one step ahead means some are turning their attention to inflation risks.
Certain analysts have attempted to pre-emptively dismiss these concerns, as we noted yesterday. But there’s no doubt it’s a question on an increasing number of lips.
JPMorgan and Morgan Stanley have contributed their own thoughts this week: the former is in the “too soon to think about” camp, the latter thinks current stimulus plans will finally bring an end to 30 years of disinflationary pressures.
Certain discretionaries have also been quick to ask whether investors’ future holds a sustained rise in price levels. Of the 10 largest DFMs in the UK, half used their Q1 commentaries to flag inflation as a material future risk.
The big unknown, as ever, has to do with timing. Even the DFMs who raised concerns recognise that this is a long-term issue, not a short-term problem. The answer may boil down to another common question: what shape the recovery takes. All options – L, U, V or W – still have their advocates.
Early evidence, once economic data has bottomed, may prove misleading. JPMorgan cautions against seeing an uptick in May/June PMI data as a sign of things to come. And even Morgan Stanley thinks it will take until 2022 before co-ordinated monetary and fiscal stimulus has its ultimate impact.
That means that even wealth managers with long-term views have yet to translate their inflation concerns into fund selection decisions. Those buying gold, for example, are largely doing so in light of its other safe-haven qualities. But as most portfolios worth their salt target real rather than nominal returns these days, DFMs will be conscious of the need to keep close tabs on price expectations.
Just do it
One other recovery shape that has been mooted is a Nike “swoosh”. Analysts at HSBC have such thoughts, based on a V-shaped recovery in China and an L shape in Europe and the US.
That has meaningful implications for the higher end of the consumer discretionary sector, rather than Nike itself. The bank notes that luxury has not underperformed during the current correction, the first time this has happened in 20 years. Part of the reason may be that investors agree with its thinking, and reckon China is due a quick recovery.
It has chosen four stocks that could benefit: LVMH, Kering, Hermes and Moncler. As with Goldman’s ‘Granolas’, these are again European stocks (LVMH features in both groups) – food for thought for those allocators who have already fallen back on familiar habits by cutting exposure to European equities.
But once again, DFM’s own preferences are relatively well positioned to play this theme. Several of the funds we highlighted last week hold LVMH, and the most popular European equity vehicle – BlackRock European Dynamic – also has a position in Kering.
In the UK, too, one existing favourite is already well placed. HSBC has upgraded Burberry as part of its analysis, saying that while fundamentals are weaker, its valuation has more than priced this in. Burberry’s biggest holder in the UK retail universe is, of course, Lindsell Train.
It may seem counter-intuitive for luxury good sales to hold up at a time when retail spending is being transformed - even in countries that have withstood the virus relatively well. But if they do, fund selectors will know where to turn.
A positive note on dividends this morning, with Vodafone leading the FTSE higher on its decision not to cut its payout. Somewhat fortuitously, the company has benefitted from its decision to cut its payout last year – it bore that burden back then, which makes it look relatively resilient now.
But the wider market mood is firmly established at this point, and some fund selectors’ hoped-for solutions may not do the trick. Yesterday Troy Income & Growth said it was “almost certain” to rebase its own payout, the thinking being that resetting is a more sustainable option than dipping into dividend reserves.
That’s a logical move, on the assumption that payouts won’t bounce back quickly. But that also suggests trusts’ much-vaunted reserves may not prove much use to them after all. As Numis put it yesterday, “the approach may need to be different if there is an expectation that income levels from equities are likely to be fundamentally lower for a sustained period.”