From Brexit to Trump, it has been a year of political shocks, all with repercussions for financial markets. For Chris Hills, chief investment officer at Investec Wealth & Investment, it has reminded him to expect the unexpected. This means cash balances across the group’s portfolios are higher, and it is poised to take advantage of any market wobbles in response to further political turmoil.
Says Hills: “Most of our clients are somewhere between an absolute return and relative return investor. As such, we are positioned for risk aversion in the short term. Central banks are increasingly saying they have done as much as they can. We now need fiscal loosening.”
He believes the rising trend of populism will start to weigh on policymakers. “There are those that haven’t participated in the benefits of quantitative easing. They don’t have a house and they haven’t invested in the stock market. Politicians realise that to get re-elected they need to show some generosity of spirit. We may see this in Europe, in the Dutch, German and French elections.”
The prevailing mood means he favours real assets over bonds, though, given the volatility, Hills is careful to sustain adequate diversification and not to take significant positions in any one asset class. He believes that bonds are overvalued even after the recent rout, particularly in the case of developed market government bonds.
He adds: “Our clients are generally 50 rather than 80, so have time to ride out volatility. If we are wrong on the economic outlook and there is a depression, there could be something left in gilts or treasuries, but we think it is unlikely that the global economy is going to fall over. We are retaining exposure to the bonds of some well-run corporates, some emerging market debt and high yield.”
Broad base
The group’s high-yield exposure is particularly focused on the US, where Hills is more confident about the robustness of the economy. US high yield has taken a hit over concerns about shale gas producers and is therefore more attractively priced. Hills believes there may also be some tailwind from a strengthening of the US dollar.
He is increasingly drawing income from alternative asset classes, many of which have emerged during the past 20 years. He cites areas such as infrastructure or commercial real estate, plus more niche property options such as GP surgeries and student accommodation. He points out that many of the property investments they invest in are based on long, 20-year plus, leases with no break clauses and the income is around four times that currently paid on gilts.
Within the group’s equity holdings, they tend to have a natural quality bias, but Hills recognises that many of this type of ‘quality growth’ companies have become very expensive and he is mindful of that.
He says: “In general, the number of years we are overweight Unilever is likely to be far greater than the number of years we are overweight Glencore. The latter we would aim to own in the right part of the cycle. Ultimately, our focus is more solid growth and quality, but we are not looking at companies on 30x earnings.”
In terms of geographic spread, Hills says the UK is “awkward” as there are concerns around the outcome of a Brexit, its impact on sterling and the currency account deficit.
“The UK is difficult due to uncertainty, particularly over a two to three-year view. We have confidence in the UK economy longer term, but there are some headwinds. That said, 75% of revenues from FTSE 100 companies are drawn from abroad, meaning the index has performed better.
“There are more problems on domestic sectors, however. Nevertheless, the UK market is still useful in generating an income at a time when sources of income are scarce.”
In Europe, Hills believes the recovery is more broad-based than has been suggested and that there are opportunities. However, he admits there are still real problems in the banking system that need to be fixed, which may become more important.
There are also likely to be political wobbles in the year ahead as the region has to navigate several general elections and the outcome of the Italian referendum.
