In this Q&A, Rebecca Tomes talks to Chris Bishun, Investment Solutions Director at Brooks Macdonald. They discuss where Bishun sees the main threats and opportunities to growth and how the asset manager is supporting advisers and their clients through the choppy waters of today’s uncertain market conditions
RT: WHAT ARE YOUR MARKET VIEWS AS 2022 BEGINS AND WHAT ARE THE KEY RISKS THAT YOU ARE KEEPING AN EYE ON?
CB: Before we get into 2022, it’s worth having a quick look back at 2021 – as that really sets the stage for what we’re seeing going forwards. I think 2021 was a year of two halves. As we entered the year, inflation and strong growth expectations dominated the headlines as the great reopening took centre stage. From a market perspective, that caused value to outperform – whilst bonds dramatically sold off.
This started to reverse towards the middle of the year as the question of whether inflation was persistent and would continue arose – causing an outperformance for growth and underperformance for value. More lately, we have seen the rise of Omicron, which has caused some nervousness and lays the foundation for what we can expect to see in 2022.
How central banks choose to navigate this changing inflationary environment will be the main driving force this year, as governments take a more enhanced role in the economy. In our view, when it comes to interest rate moves, it’s more about the pace of rate hikes rather than when they will happen. There’s a lot of talk at the moment about when that first rate hike will occur for the US; it has, of course, already happened for the UK. It’s a bit of a catch 22 – or, as I like to say, a catch 2022. How do we monitor and manage inflation without killing off growth? This will be through a combination of carefully reducing monetary stimulus in conjunction with a fiscal policy and the increasingly important use of forward guidance as well.
If we look at the numbers, UK CPI has risen to a 10-year high of 5.1%. In addition, it has just been revealed that US CPI is at 7%, which is the highest figure in nearly 40 years. As a result, there is a lot of momentum and call to action, warning that the Fed must act sooner rather than later. There is somewhat of a question mark as to whether the momentum will wane over the coming months – that being said, Main Street and Wall Street are learning to live with COVID, as its status moves away from pandemic and more towards endemic. It’s worth noting that it has been restrictions and vaccine rollout programmes that have caused the issues, rather than COVID itself. Therefore, vaccines are and will be the game-changer for growth. In terms of the bigger picture, we see that we are moving from a recovery to a middle-phase of the business cycle.
Aside from inflation, there are a few other things to keep an eye on as we head through the course of the year, that could cause risk.
In terms of balance sheets, I think we can expect to see early signs of budget cuts from central banks and that fiscal drag may cause an impact on those growth numbers.
Furthermore, looking at companies – last reporting season 81% of companies beat their mean estimate earnings. Therefore, a big question is whether we will continue to see that going forward – will companies stay in a strong position? The key to that will be supply chain issues. We saw these issues come through in 2021, and we’ve now started to see companies shorten their supply chains and become more diversified.
From a political landscape, the US November Midterms are going to be crucial. If Republicans take control of Congress, we may see a lame-duck period. Closer to home, with what’s currently going on in the news, the May elections in the UK will also be quite important. We may see a vote of no confidence, which only requires 15% of MPs to vote in this way.
It is also important to touch on ESG. Following Cop26 at the back end of last year, I believe the focus is going to move from Governments to corporates, as we’ve seen them talk a lot about ESG – but what are they actually doing to address the various issues? What is the implementation plan going to look like? There have been some aggressive standards set by the EU (‘Fit for 55’), for example, which aim to reduce net greenhouse emissions by at least 55% by 2030. This initiative is not going to come at zero cost, so I think that’s going to cause a few bumps in the road for companies.
RT: HOW DOES THIS TRANSLATE INTO PORTFOLIO CONSTRUCTION AND YOUR POSITIONING IN LIGHT OF RECENT MARKET VOLATILITY?
CB: I think 2021 has been a transition year for both economies and markets. In terms of navigating this investment landscape, we have adopted a balanced asset allocation strategy. Prior to 2021, we’ve had a bias towards growth exposure (focusing on sectors such as tech and healthcare) but due to the caution around inflation, we’ve started to balance out: adding more to value. We are now in the position of being “ready to pounce” – and are ready to tilt our portfolios accordingly.
The prospect of rate hikes will be determined by the path of inflation, but I think as we go through the normalisation process, it will vary from region to region. Everyone focuses on the US and UK, but what about the rest of the world? I anticipate that because of this, we will see increased volatility around rates and currencies and more frequent sector rotations causing dispersion in stock markets. Our current balanced approach will navigate somewhat of that volatility. Any inflationary expansion is likely to support cyclicals over defensive sectors, value over growth (as I have talked about), but also smaller over larger companies – we’re very mindful about those moving parts within our portfolios.
I don’t think we’re at investor sentiment exhaustion just yet. We very much subscribe to TINA – There Is No Alternatives to equities – and that’s despite the S&P posting 70 record highs in 2021. We still think there’s plenty of scope in the value trade, from a short to medium-term perspective at least, and that has already started to play out over the past week or so. For example, we have seen a rise in real rates causing the NASDAQ to shed 4.5% over the first five trading days of 2020 and that challenge for leadership will continue through the course of the year.
When looking at value versus growth, a lot of people think purely at the sector level. However, I believe you can take that one step further by thinking about subsectors. Growth, for example, is the obvious one in that it is the area in which a lot of people have been invested. Furthermore, tech – not all tech is growth, there are definitely some value areas in there, so can we capitalise on that? What are the expectations going forwards?
First and foremost, however, you have to take a country perspective when thinking about asset allocation. For us at Brooks Macdonald, we like Asia, and certain areas of EM, but it’s about being selective. As a house, we are structurally biased towards UK equities, given that our client base very much has UK liabilities. In addition, that has given us meaningful exposure to commodity and financial related sectors, which will benefit from a growth and increasing interest rate environment as well.
One of the key areas in which Brooks Macdonald can add value is through our broader asset allocation – our ‘megatrend’ themes. We are moving away from traditional asset allocation, which is just looking at country allocation, and are thinking about some of those bigger long-term moves, such as tech and healthcare. We have also now introduced ESG and smaller companies across the globe as well.
In terms of bonds, there is some caution around the bond elements of the portfolios. We have already started to reduce our exposure, for example by reducing the duration – focusing on less interest rate sensitive areas (the shorter duration elements of the markets) – whilst making sure that we still maintain some bonds, as they provide volatility dampening effects in the portfolios. 10-year US bonds are currently around 1.75% – so, if that continues to rise, we may look to potentially add bonds back to the portfolios.
Alternatives is another important area because where we have subscribed to TINA, and are biasing towards equities, we are mindful about what beta risk we’re taking on with the alternatives allocation. From that perspective, we are thinking about the correlations at a portfolio level. I anticipate that we’ll eventually reach a stick or twist moment, regarding whether we should maintain balance in our portfolios and shift towards value or growth accordingly.
RT: YOUR BM INVESTMENT SOLUTIONS SERVICE IS GAINING A LOT OF TRACTION WITH INTERMEDIARIES – CAN YOU TELL US MORE ABOUT THE SERVICE AND WHAT IS IT THAT INTERMEDIARIES ARE LIKING MOST ABOUT THE SERVICE?
CB: BM Investment Solutions, or BMIS (as we call it internally), is about creating strategic partnerships with intermediaries. That doesn’t mean just having a price deal. Pricing is very much a function of what the intermediary needs in order to help them run a more efficient business. It is not just about putting a logo on a fact sheet either – that’s a relatively simplistic thing to do. It’s thinking about what you can provide as a discretionary fund manager that’s over and above. I call it, ‘non-investment related Alpha’.
COVID really spurred this on; when we had that Minsky Moment in the market, intermediaries needed strong real-time information. In addition, intermediaries needed this information to be in a language they spoke that could be easily passed on, and understood, by their clients. Similarly, it gave them a chance to think about their business. A lot of the people we speak to are business owners themselves and are asking, “what’s next” in terms of where they want to get to. Or they’re wondering if they should be planning for retirement; if this is their chance to tap out of the business; if they need building resources; if they should think about growing, etc. I think having a soundboard to those aspects and understanding what’s going on in the wider market has been the beneficial factor for our strategic partners.
Therefore, BM Investment Solutions is a B2B consultation function that helps us understand what keeps intermediaries up at night and how we can help them achieve their goals – so creating a tailored service is inherent to this.
Being able to tap into the different elements of our business, however, is what I believe to have been key. Yes, there’s the investment side – but what about operations? What about marketing? How can we support the asset transition process? I think that’s how we’re able to really help our business partners. There are, of course, the elements of providing technical expertise and narratives to partners, very much in their language, but the soundboard effect is ultimately what works best in practice.
About Christopher Bishun, CFA
Christopher is a technical expert working with strategic partners in creating investment offerings and providing market guidance. Prior to joining Brooks Macdonald, he was a Director of EMEA portfolio analysis and solutions at Blackrock, and spent 11 years at Barclays, ultimately as Head of Offshore Investments in Jersey. Christopher holds the IMC and is a CFA Charterholder.