It may be more than a decade ago, but 7IM’s, Senior Investment Strategist, Ben Kumar says investors are finding it hard to shake off the economic and financial habits established during the Global Financial Crisis – a world of low growth, low inflation, and low confidence.
Yet, Kumar is confident that the next decade will be different from the last, commenting: “Individuals have left a recession with more money than they started, while governments are ready to spend, and business confidence is surging. More confidence means more spending, which creates more jobs and more demand: a virtuous circle leading to a genuine wave of growth.”
In order to take advantage of this, Kumar says 7IM is positioning for a strong rebound in economic growth over the next few years.
He continues: “We are tilted away from the winners of the last cycle, such as mega-cap tech, and towards the winners of the next one. This includes looking at undervalued sectors and regions, such as industrials, mid-caps and emerging markets.”
“There is also a greater focus on cyclical, smaller businesses, spread out across the world, rather than just in the US, as well as longer-term thematic investments into healthcare companies and businesses looking to tackle climate change, rather than the mega-cap tech media platforms.”
In the fixed income space, Kumar notes that government bonds will still protect portfolios in periods of turmoil, but real returns are likely to be low. As interest rates begin to grind upwards, an allocation to higher-yielding parts of the universe therefore offers more protection in the form of higher coupon payments, he suggests.
The inflation conundrum
Kumar predicts that inflation will likely increase, as wage growth continues its upward trajectory. However, he underlines that it is not “necessarily a bad thing”.
He comments: “Investors often forget the fact that central banks have positive inflation targets for a reason, because a bit of inflation is good for growth. It kickstarts the economy, and then keeps things moving.
“There’s a lot of noise around supply chain issues, much of it justified. However, these disruptions are likely to be localised and temporary, solved by the normal mechanism of supply and demand. Wood prices in the US, for example, quadrupled at the start of 2021 before plummeting back to where they started within six months. As prices increased, suppliers and lumberyards across the world supplied more wood, to make more money.
“High prices solved the lumber shortages, and now there’s about the right amount of wood to keep the market steady. The same will be true of semi-conductors, new cars, building supplies, and iPhones. It’s capitalism at work.”
And interest rates?
With inflation higher, potential interest rate hikes are an obvious concern for investors.
While Kumar believes predicting exactly when rate hikes will happen is a fool’s errand, at some point, central banks will have to begin raising rates and therefore investors need to prepare.
“We have positioned portfolios to be ‘all-weather’ by design, and hold a few tactical positions that should do well in a rising-rate environment: underweight government bonds, overweight alternatives, overweight value and underweight tech,” he says.
“While risk should only be taken when it can deliver positive returns and is diversified across a wide range of markets, companies and governments, markets are evolving and certain nations such as China are expected to prosper in the future. For investors looking to capitalise on the best opportunities over the long-term, this suggests a higher weighting in emerging markets moving forward.”