Published on: July 17, 2020

It has been another super busy week and what better way to crown this than with an edition of News, Views and Truths?

This week’s blog is going to be a bit different.  Every single year, we receive our asset allocation guidance from Morningstar.  And at this time, we communicate this with our clients, advising them of our current thinking and the alterations we are looking to make to our portfolios; our clients’ portfolios, for the coming year.

Yes, we look to make changes once a year. Yes, we are a dying breed of long-term investors.  Yes, we have very little portfolio turnover.  Yes, we do all the spadework and analysis at the beginning and then leave the fund managers – the experts – to their job.  Novel idea huh?

So, I thought, as we will be writing to our clients soon regarding these changes, why not use this platform to let the world know our current thinking and what we are looking to do.  So, for the next three weeks, I will be outlining the three main themes that the Investment Committee of Three Counties and Greaves West and Ayre have agreed will be influencing our portfolios over the next 12 months as a minimum.

The question is, what are the themes?

Theme one and this week’s topic is inflation; the silent killer of portfolios.

Rising, and eventually, high inflation is a situation that many investors and indeed, Investment Managers, have not experienced in their investing career.  Combined with rising bond yields from the historically low Bank of England base that we are experiencing today, along with a degrading of corporate creditworthiness, this environment that we are moving into is viewed, in my eyes, as the most challenging since the 1930s.

In the near-term, core inflation dynamics across regions are likely to be determined by whether the Coronavirus is more of a demand or a supply shock. 

In the U.S. the expectation is that sectors such as hotels and airfares are to suffer in the short-term, mildly offset by the resilience of sectors such as healthcare. Overall, expect core inflation to moderate to around 0.8% by year-end before rising in 2021 through base effects. 

In Europe the scenario could be similar; expect core inflation to fall to around 0.5% by the end of this year on depressing demand effects from the crisis and then to remain fairly flat through 2021. Near term volatility is likely to also be elevated given disruptions in data collection.  

In the U.K. the expectation is a similar situation to Europe where supply constraints on essential products are more than offset by the demand impact. The extent of the pound depreciation from here will also be a major swing factor in inflation and consequently, the expectation is for core inflation to be 1.3% by the year-end.

However, forces are likely to keep interest rates anchored while inflation risks are skewed to the upside.  An intensified savings glut post-recession and continued central bank accommodation should keep downward pressure on real rates over the horizon.  Looking past the near-term disinflationary forces at play, upside risks to inflation may emerge:

First off, we expect globalisation to be dialled back faster as firms try to reduce the complexity of their global supply chains, potentially increasing input costs that may be passed on to consumers.  The effects of globalisation on suppressing inflation were:

  • Cross-border immigration and the offshoring of production increased the global labour supply, putting downward pressure on workers’ wages, particularly among the lower-skilled
  • Enhanced competition in the manufacturing sector led to a decline in the cost of many consumer products.

Secondly, private and public sector debt levels will be significantly higher going forward. If governments continue to engage in expansionary policies, fiscal dominance of monetary policy may eventually fuel inflation.  While government attempts to keep household incomes stable with job retention schemes have the best of intentions, they will simply result in more money chasing after significantly fewer goods and services.  To put it bluntly, the government is handing out money when there is nowhere open to spend it.

So if that is our rationale, how are we looking to position for it?  Our clients will find out in the coming weeks as we write to them.  Our professional contacts, who we work closely with, are being advised as we speak through our usual catch up meetings.  For the rest of you, give me a call; I’m more than happy to discuss and as you probably know, or can at least surmise, I love a good chat.

See you all next week for theme number two…

This week’s podcast is available here.  If you click on one link this week, click on that one.  For those who have not experienced it, the podcast covers my usual market commentary, along with guest contributors who discuss other areas of finance and it would be fantastic if you could give it a listen.  Seriously, if you like this blog you will love the podcast.  It’s like comparing your birthday, which is great, to Christmas Day, which is the best.

My latest “When Andrew Met…” video is live here.  Easily the most-watched video of the series already, I talk to Matt Jarvis, manager of the Legal & General UK Property fund on why UK property funds are currently suspended from trading, how he is managing the fund within the lockdown environment and the post-COVID outlook for property.  A genuinely fascinating watch, Matt is regarded across the commercial property sector as a leading fund manager and his particular fund is our sole property exposure across all our investment portfolios.

And finally, our playlist! Have a great and safe weekend and I shall see you all next week…

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