Three things to watch from the Managed Balanced team
As we approach the halfway mark for 2021, we are at an interesting point in markets. The pandemic continues to dominate most people’s thinking, but with countries such as the UK and US reopening, investors are trying to work out what markets have in store for the remainder of the year and beyond.
In this light, we thought it would be interesting to share three trends we are seeing as managers of the Managed Balanced Fund. The short term is still dominated by the pandemic and we have highlighted one company we think could benefit from reopening (as well as longer term). As the year progresses though, it will be interesting to see how markets adapt to the withdrawal of stimulus and even longer term, the growth of new markets such as green bonds. So without further ado, here are our three trends.
1. We’ll be eating out to help out (our portfolio returns)
May has been a dismal month weather wise but the outlook for the UK economy is much sunnier. One company we have added to the portfolio is The Restaurant Group (TRG), which operates around 400 restaurants in the UK, including brands such as Wagamama and Frankie & Benny’s, as well as a number of pubs.
The Restaurant Group has used the past year to strengthen the business. Sadly, that meant closing 250 sites, focusing the business on profitable locations, while more than half of the company’s leases are now turnover based. By issuing new shares in April last year and extending its overdraft facilities, TRG has the funding to make the most of the reopening.
While the past year has clearly been difficult for TRG, there have been bright spots, including Wagamama’s operational performance when restaurants were allowed to open in the second half of 2020. We believe TRG is well positioned as the economy comes out of hibernation, with UK consumers no doubt eager to spend some of the £140bn in excess savings that they built up since the start of the pandemic.1
2. Start thinking about 2022
Markets are forward looking and will start to think about what the first half of 2022 holds as early as summer this year. While this is part of the market’s usual psychology, the effect may be accentuated this year as we compare a recovering or even largely-back-to-normal economy with 2020’s ‘pandemic economy’.
This will be seen in company earnings, with US earnings growth starting to slow significantly over the next couple of quarters. As shown below, S&P 500 earnings growth is expected to moderate from a cyclical high of 58% year-on-year growth in Q2 this year to a more normal 15% by the end of 2021.
For the S&P Value index, this deceleration is even more pronounced – year-on-year earnings growth will go from forecasts of more than 100% in Q2 to less than 10% by the end of the 2021. Current forecasts do not assume any new government stimulus – however, neither do they include any changes in corporate tax levels.
Investors should ultimately be able to take this in their stride, particularly if inflation proves to be transitory. However, government and monetary authorities may face difficulties when weaning consumers and businesses off stimulus, potentially leading to heightened volatility over the next year or so. We might also see greater divergence across global equity markets, as the experience of the pandemic and its economic impact varies widely from country to country.
3. Fixed income goes green
There is growing momentum behind green bonds, where companies or governments issue bonds to specifically finance green projects. France and Germany are leading the way in terms of issuance in Europe, but the UK is poised to issue its first green bonds at some point over the summer.
Recently, we have been actively increasing our allocation into green bonds, such that approximately 10% of the fixed income allocation is now in approved green sovereign bonds and will look to further increase this as the opportunities arise. While green bonds do tend to come with a slight premium, we believe this is well justified, and the market remains attractive with respect to other issues such as liquidity.
What did we miss out?
There are plenty of other issues in markets today, not least the rotation from growth to value or the debate around inflation. While we believe the pick-up in inflation will prove to be transitory, we added to some US inflation-linked bonds recently as we saw value in the market. Overall, however, we remain focused on trying to add value through our positioning in equities and bonds and, while markets have run a long way, we are continuing to find opportunities.
With thanks to David Shaw, Co-Portfolio Manager for Global Equities, for his contribution on the outlook for 2022.
Stocks mentioned in this article are for informational purposes only and should not be taken as a recommendation to buy or sell.
Emerging Market Risks: emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. As a result, investments in such countries may cause greater fluctuations in the Fund's value than investments in more developed
countries. In addition the reliability of trading, settlement and custody systems in some emerging market countries may not be equal to more developed countries and result in greater operational and liquidity risk.
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Currency Risk: the Fund holds investments denominated in currencies other than the base currency of the Fund. As a result, exchange rate movements may cause the value of investments (and any income received from them) to fall or rise affecting the Fund's value.
Interest Rate Risk: fluctuations in interest rates will change the value of bonds, impacting the value of the Fund. Generally, when interest rates rise, the value of the bonds fall and vice versa. The valuation of bonds will also change according to market perceptions of future movements in interest rates.
Further explanation of the risks associated with an investment in this Fund can be found in the prospectus.
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