Continuing to rebalance

Changes during Q1 essentially continued to pursue two related themes – reducing the extent of the portfolios’ overweight position in ‘growth’ companies vis-à-vis ‘value’ and increasing exposure to investments that should better protect them from rising inflation. They are related because governments are intent on fostering a strong economic recovery.

Key themes

The changes in Q1 picked up where Q4 left off – that of rebalancing somewhat the extent of the portfolios’ overweight position in ‘growth’ companies, given the disparity in valuations and the economic backdrop. The portfolios continue to pursue a growth mandate for reasons highlighted in a previous column (‘Remaining focused on the long-term’, 7 August 2020). There is no shortage of entrepreneurial managements and companies which are embracing both existing and emerging trends and technologies. These will continue to provide plentiful opportunities for the patient investor.

However, the increasingly evident determination of governments to engineer a strong economic recovery – the UK Budget and President Biden’s spending and infrastructure packages being recent examples – reinforce the rationale of increasing exposure to those unfashionable companies which should disproportionately benefit. Such companies need not be poor quality. But they tend to have lower ratings in part because their prospects are more closely tied to the economy – and economies have tended to struggle in recent years.

Within this modest rebalancing, exposure to the UK has been increased as the market looks good value relative to others on a range of valuation metrics. Economic prospects remain encouraging with an EU trade secured, numerous trade deals signed since, and application made to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which offers tremendous potential. Meanwhile, the economy remains attractive to inward investment and the market has meaningful exposure to such ‘value’ sectors as the banks, oil companies, pharmaceuticals and miners.

But the Q1 changes have also continued to recognise the risk of rising inflation. Last month’s column (‘Preparing for inflation’, 12 March 2021) again highlighted the investment implications. The impact of the pandemic on globalisation, the gradual but meaningful change in our demographics, likely shifts in the balance between capital and labour, the scale of the fiscal stimuli, the likelihood the new money will this time reach the real economy and, perhaps above all, the political realisation that inflation is now necessary to help deal with the debt, being some of the reasons weighing in inflation’s favour.

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