Though Jane believes there is compelling evidence to suggest an inflationary period is on the horizon, and that he and multi-asset co-manager, Anthony Rayner, may have to change tack.
“There are a few things we would need to worry about that would make us question that basic lower for longer world environment we are in,” said Jane.
Worry list
One is sufficient evidence from the market, which Jane said he has already begun to observe.
Firstly, recent economic data has been outperforming drastically lowered expectations, especially in the US, Jane said.
And Jane has perceived a shift in tone within the equity markets. “Cyclicals like industrials and materials have been doing better as of late whereas defensives such as utilities, tobacco and consumer goods have been doing slightly worse.”
There has also been a notable change in the bond markets as well where “the recent shift down in some government yields has stopped while lower quality corporate bonds have been performing well,” said Jane.
Fiscal focus
Jane and Rayner also said there is reason to suspect policy makers might start to emphasise fiscal policy over monetary policy, which would also impact the lower for longer status quo.
“It is generally becoming more and more accepted that central banks have been doing a lot of the heavy lifting,” Rayner indicated. “We would need to question the timing and degree to which this greater emphasis on fiscal policy would impact various markets.”
However, the pair said the prospect of such a policy shift is causing them to consider purchasing infrastructure, resources and capital goods assets, which they have not held much of previously.
If the duo’s hunch is correct and this is the beginning of a new phase for financial markets, Jane and Rayner anticipate this will trigger a significant overhaul of their multi-asset portfolio.
Fixed income risk
“We would have to aggressively reduce what we have in government bonds because we have got some very long duration government bonds,” said Jane. “Within corporate bonds, we would want to change to shorter dated coupons.” And Jane added he would have to augment the balance of big global defensive companies currently in the portfolio.
However, he said he feels comfortable maintaining his bias toward US and emerging market equities.
“It is almost like we have gone back to the old orthodoxy where the US led and everyone else followed,” Jane mused. “The UK is still dealing with its Brexit overhang and Europe seems to be pursuing policies that are wholly damaging toward economic growth. Whereas the economic data in the US has been constructive for a period of time. The US is broadly independent from Europe’s woes and is experiencing wage and employment growth and benefiting from higher rates.”
“I think we would also count ourselves as quite positive on emerging markets that have economies that are independent of global trade in China,” he added. “In particular, we like the Indian consumer sector, Brazilian utilities and education, as well as Mexican airports. They are more attractive because they are outside the mainstream at the moment.”
