We have asked some of the top ranked fund selectors in Europe to give us an overview on how they see the current state of the market, what makes them select certain funds and what are their thoughts on inflation. As we know, being a Fund Selector is not an easy job, and, for this reason, the Sharing Alpha platform has drawn up a list to highlight the great job they do.
|Florian Rainer||Matejka & Partner AM||Austria|
|Vincent Morel||Financière ARBEVEL||France|
|Frank Huttel||FINet AM AG||Germany|
|Eirini Sotiriou||Euro Bank AM MFMC||Greece|
|Francisco Falcão Castro||Hawkclaw Capital Advisors, Lda||Portugal|
|Brendan McLean||Spence & Partners Ltd||United Kingdom|
Florian Rainer, Asset Manager at Matejka & Partner AM
The current market environment is characterized by still very expensive bond markets and equity markets, which are favorably valued on a relative basis, but in absolute terms also seem historically rather expensive. Basically, on the interest rate side, especially due to the very high levels of government debt across the globe, I almost inevitably expect a lower for longer interest rate environment, which the central banks will push in order not to put excessive pressure on the public finances of various nations.
In addition, the market is currently expecting inflation rates to rise, which is why bond prices, still at very high levels, have recently come under some pressure. In such a market environment, the time is over to simply be long the bond market, such an approach seems clearly too risky. We therefore currently like to allocate to bond funds with excellent long-term track records, which can flexibly adapt to various market conditions and select from a wide range of bond opportunities.
An example of this would be the Nomura Global Dynamic Bond Fund. If you are looking for exposure to government bonds, a globally investing inflation-linked bond fund such as the Pimco Global Real Return Fund currently looks relatively attractive to us.
On the equity side, the often used distinction between value and growth seems a bit misleading to us, we try to combine the best of both worlds by investing in high quality, attractively valued companies with good future prospects. Currently allocated funds include Threadneedle American Extended Alpha or Morgan Stanley Global Brands. An addition of alternative investments, such as gold, commodities, hedge funds, or to a lesser extent cryptocurrencies, may make sense in the expected low interest rate environment, depending on the risk profile of the investor.
Vincent Morel, Fund Selector at Financiére Arbevel
We believe market volatility may persist over the next few months, until investors focus shifts from current concerns related to inflation and an increase in interest rates, back to company fundamentals, while many of them are benefiting from increased demand as economies are reopening.
Our primary focus remains on companies capable of delivering solid and sustainable growth and compounding their earnings year after year. Although these stocks have underperformed since the beginning of the year, we still favor these quality names with healthy balance sheets, strong cash flow generation, and good management teams. We have also introduced more cyclicality into our portfolios since November, reducing our position into US mega caps, and increasing our exposure towards European small & mid caps and Asian equities, as we think they should benefit more from the global reopening.
Structural growth trends have also been core holdings within our portfolios for a decade now, as companies able to innovate and adapt quickly to the undergoing mutations of our economies should deliver substantial growth for many years to come.
The Covid-19 pandemic is causing these structural trends, such as digital transformation in all industries, innovation & increased spending in healthcare, or sustainable development issues, to accelerate further.
From an equity market perspective, we expect the recent underperformance of these themes to fade at some point, once investors will refocus on the strong growth prospects in these areas.
As long-term investors, we also expect the fund managers we are invested in to stick to their investment philosophy and focus on the underlying business of their holdings, and not try to chase any short-term market fluctuation. We believe this is key to deliver solid and consistent performance over time.
Vincent was our Fund selector of the month in June 2020, you can read his full interview here
Frank Huttel, Head of Portfolio Management at FiNet Asset Management AG
Our view on the markets
Our outlook is very mixed for equities. On the one side, the global economic outlook is brightening after the Covid-shock, but on the other side, valuations are very stretched in some parts of the market. This is especially true for some Tech stocks, which have massively profited from the “stay at home” trend. We have already seen some major corrections in some stocks like Peloton.
We would trim some positions and rotate into more cyclical value stocks. There is still room, even after a first rally. The relative underperformance of value is still massive. We also favor commodities and Gold (and Silver) equities as an “imperfect” hedge against rising inflation.
In addition, we would reduce the US market and move to selected Emerging Markets, especially China and India. Asia, with exception of India lately, has managed the pandemic much better than we Europeans or the US and will be stronger than before. Chinese stocks are still underweight in most portfolios.
If we take a look at bonds we are very sceptic. We don’t think that yields at the long end will rise too much as the FED and others will control the curve, but inflation will eat the interest. It’s a losing game and we desperately need alternatives.
Last but not least, we are great advocates of “real” sustainable and active investing. We have to solve the problems like climate change or loss of biodiversity. Thus, we invest in renewable energies and some other sustainable themes. Here we see great long term potential.
Francisco Falcão Castro, CIO Hawclaw Capital Advisors
The aftermath of the 2020 pandemic shock was characterised by a steep economic recovery. Quick actions from central banks and governments prevented a deep recession.
Today, the global macro picture seems healthy and strong, as economic recovery continues to pull up investors’ confidence, but it is important to acknowledge that there are potential headwinds in the horizon.
Equity markets are now at rich valuations, macro data is approaching a peak, monetary and fiscal accommodation are close to an inflection point and there are prospects of higher rates due to higher inflation. The next quarters should witness an increase in volatility as some froth is taken out of the market.
However, the medium-term picture is positive as there should be a sustainable economic recovery on the back of successful vaccination programmes and as employment, businesses, and inflation dynamics normalize. Monetary authorities should start to discuss “tapering” this summer, but the support withdrawal will certainly be a very gradual process.
Extraordinary fiscal measures should also be extinguished soon, but we understand that governments will still be supportive in other ways, such as through public investment or incentives (examples, Biden infrastructure programme or Next Generation EU Programme).
Bonds, we favour short duration and carry strategies, and we emphasize risk-taking in more idiosyncratic pro-cyclical issuers and subordinated parts of the capital structure. In equities we shift our attention towards defensive companies with high quality of earnings and strong balance sheets.
Themes, we believe financials and industrials will benefit from higher rates, consumer cyclicals will continue to benefit from the economic reopening, and secular trends sectors such as cybersecurity, digitalization, and decarbonisation should be added on market weakness.
As inflation hedges, we pick physical gold and inflation linked bonds as we still do not recognize cryptocurrencies as a valid play.
Brendan McLean, Manager Research, Spence & Partners Limited
With equities at all-time highs and credit spreads close to record lows, I am reminded of Warren Buffett famous quote “be fearful when others are greedy, and greedy when others are fearful.” Successful Covid-19 vaccination programmes and the lift in lockdown restrictions have caused economic data to exceed expectations as economies bounce back strongly due to high saving rates pushing up demand for goods and services
This has generated enormous positive investor sentiment driving valuations to higher levels and it feels like asset values can only go up. The US high yield bond market seen no defaults in April for the first time in two years. Defaults typically peak 12 months after a crisis so it is no surprise investors are optimistic.
However, investors are not currently rewarded for taking excessive risk and any negative news -such as the US Federal Reserve reducing its bond purchases or raising interest rates quicker than expected – could spark large declines as investors panic and sell to lock in any profits.
The economic cycle continues to emerge from deep recession and inflation worries investors as it may cause the long streak of positive returns to end when central banks raise rates to combat it. I expect inflation to increase in the short term as consumers spend their excess savings and demand outstrips supply, but it should reduce in the coming years with central bank intervention.
In previous crises, government bonds provided a safe haven as they are negatively correlated to equities. However, in the current low yield environment they will not offer as much protection which makes portfolio construction a challenge. Investors could take advantage of the current positive investor sentiment which has caused the cost of equity protection to decline.