2020 hit the reset button on a decade of lacklustre growth, says Salim Jaffar, Investment Analyst at 7IM.
A new era of consumer and corporate confidence should set the world up for a period of strong economic growth. Despite this backdrop, 7IM has recently rebalanced holdings across its model portfolios, moving from overweight to neutral equities, balanced by an increased weighting to alternatives and cash.
Commenting on these recent moves, Salim (pictured) said: “For the past decade or so, policymakers have been unable to create the virtuous circle of consumption and investment to spur self-sustaining growth. However, the 2020 recession hit the reset button. People are willing to spend again, while governments have ditched austerity.”
“Policymakers around the world have made it clear that they’ll stay supportive for a long, long time. Companies have renewed confidence to invest for the future. We are now at the start of a sustained period of growth, fuelled by confidence and expansion across the global economy.”
“Concerns over new variants are inevitable, but these won’t cause longer-term issues for markets. The world is far better at dealing with the virus than it was at the start of the pandemic, markets know this and are very unlikely to panic to the same degree they did in 2020.”
This favourable backdrop prompted 7IM to move to an overweight position in equities across its model portfolios in August 2020. Since that time, equity markets have rallied almost 40%, with 7IM’s Investment Management team believing now is an opportune time to realise some of those gains.
Salim adds: “Given the rally in equity markets, we have opted to take our profits from our overweight equity position and return to neutral, resulting in slightly higher cash and alternatives allocations. We still believe that the world is well placed for strong economic growth. However, economic growth and markets are not exactly one and the same.
“Markets are pricing in good economic conditions and are looking considerably more expensive than they did back when we went overweight equities.”
For its remaining equity holdings, 7IM is taking more selective exposure, rather than an overweight position in the broader equity market, believing a more robust consumer-driven cycle will see different winners emerge.
Salim commented: “Many regions and industries that have struggled to attract investors over the past decade, are better positioned to capitalise than the huge US tech giants. Opportunities still exist in the US, but there are better ways to take US exposure than pilling into big tech.”
The inflation bogeyman
While inflation fears have cast a shadow for much of 2021, Salim says inflation expectations can be a good proxy for confidence levels: “With the right amount of price and wage growth, people are encouraged to take decisions that are positive for the economy. We haven’t heard the word ‘Goldilocks’ for some years now, but there is an inflation sweet spot that is just right to keep the economy humming.”
That said, as higher inflation and a change in direction for interest rates have become more likely, the group has insulated its portfolio against rate rises, using allocations to alternatives and to non-mainstream bonds rather than conventional fixed income.
|Tactical Asset Allocation themes||Implementation|
|The world is getting older||Healthcare Companies|
|Bond safety comes at a price||Alternatives|
|Go to Asia for yield||Asia High Yield|
|A US housing boom is underway||US Mortgages|
|European Banks aren’t scary||European Alternative Tier 1s|
|The COVID-19 recovery has kickstarted a new economic cycle||Growth+ Basket|
|Selling equity market insurance after a disaster||US Equity Volatility Carry|
|Investing in a cleaner future||Climate Change Solutions|
Despite concerns over new covid variants, talks of tapering, and fuel shortages, the group’s view of the world has not significantly changed this quarter, and there has been no need to introduce completely new managers into portfolios.
Aside from trimming equity this quarter, 7IM has introduced an Asia High Yield position into the adventurous risk profile models by recycling some of its overweight equity profits into the asset class. Salim adds: “Our conviction in the asset class is strong and given the recent issues in the Chinese property sector, we now believe that Asia High Yield is offering returns attractive for an adventurous risk profile.”
Salim concluded: “Short term-flailing around, changing portfolios too often, and not allowing your views to fully crystalise in markets is more likely to be a zero-sum game compared to patient, long-term investing. As such, the recent shifts we have made to the portfolios have been very moderate, consistent with our long-term philosophy.
“Our core views and trades have remained the same, with no new managers entering our models in the most recent rebalance. Our conviction in those that we currently hold remains high.”