Miton’s Anthony Rayner: Humming Along?

• Recession and deflationary risk no longer the talk of the town
• Entering an unsynchronised central bank rate cycle
• Sector dispersion provides fertile ground for active managers

Anthony Rayner, manager of Miton’s multi-asset fund range, comments:

“Economic activity remains strong globally, helping to push markets to new highs. This so called ‘growth trade’ can be traced back to early 2016 when concerns around global growth, particularly Chinese growth, started to fade.

“Since then, equities have outperformed bonds, and within equities, emerging markets have outperformed developed markets, while economically sensitive equities have outperformed defensive equities globally. In short, risk assets have outperformed.

“This degree of sector dispersion is fertile ground for active managers. We’ve had the view since the middle of 2016, when data flow changed convincingly, that strong growth and low inflation would be the primary trend, and positioned ourselves accordingly.

“Global economic activity indicators like the Purchasing Managers Indices (PMI) remain at encouraging levels and the current third quarter corporate earnings season has also been broadly promising so far. For example, the number of US companies providing positive guidance has risen to a six year high. Unsurprisingly, recession risk and, for that matter, deflationary risk, are no longer the talk of the town.

“So what are the risks? They are effectively infinite, but key ‘predictable’ risks that might disrupt this primary trend include policy risk. A key role of central banks has been to ensure economic stability. Previously, this meant curbing inflationary pressures, as in the 1970/80s that was the key destabilising force. Clearly, things have changed and central banks are increasingly focused on asset price inflation. That said, there are areas where inflation is starting to build, albeit not yet to worrying levels, and indeed some inflation, for example a steady increase in wage inflation, should be considered a good thing for economic stability.

“Central banks rightly, remain in the spotlight. They are tasked with raising rates in a still very indebted environment and reducing their material holdings of government bonds, without undermining financial markets. It also seems that we’re entering an unsynchronised central bank rate cycle, compounding the move into unchartered territory, as policy had been broadly coordinated since the Great Financial Crisis.

“Political risk in many countries remains elevated and, while not detracting materially from the primary trend, it’s clearly impacting markets (note sterling’s collapse after Brexit and the subsequent reluctance to rebound, and the ‘Trump trade’ in the US). Both the US and the UK governments seem to be in a permanent state of crisis and there are potential market moving events on the horizon.

“In the UK, front of mind is the survival of Prime Minister Theresa May, the type of Brexit achieved and the potential for a Corbyn victory. In the US, it’s the investigation into alleged collusion between the Trump campaign and Russia, potential for tax reform and nomination of the Fed chair and vice-chair dominate.

“In a period where sector leadership has been so persistent by historical standards, opportunities have been considerable for those investors with the freedom to asset allocate away from benchmarks. For example, to take two extremes (year to date, in sterling), the FTSE developed country telecom sector is down 6%, while the FTSE developed country tech sector is up 28%.

“From a risk perspective, this implies that mean reversion risk is rising by the day and we have been trimming our winners and investing the proceeds into better value opportunities to limit this risk. If we need to take more serious action, for example on the back of a sustained risk-off period, we have the ability to be very defensive in absolute terms as we’re not constrained by benchmarks.”

• Recession and deflationary risk no longer the talk of the town
• Entering an unsynchronised central bank rate cycle
• Sector dispersion provides fertile ground for active managers

Anthony Rayner, manager of Miton’s multi-asset fund range, comments:

“Economic activity remains strong globally, helping to push markets to new highs. This so called ‘growth trade’ can be traced back to early 2016 when concerns around global growth, particularly Chinese growth, started to fade.

“Since then, equities have outperformed bonds, and within equities, emerging markets have outperformed developed markets, while economically sensitive equities have outperformed defensive equities globally. In short, risk assets have outperformed.

“This degree of sector dispersion is fertile ground for active managers. We’ve had the view since the middle of 2016, when data flow changed convincingly, that strong growth and low inflation would be the primary trend, and positioned ourselves accordingly.

“Global economic activity indicators like the Purchasing Managers Indices (PMI) remain at encouraging levels and the current third quarter corporate earnings season has also been broadly promising so far. For example, the number of US companies providing positive guidance has risen to a six year high. Unsurprisingly, recession risk and, for that matter, deflationary risk, are no longer the talk of the town.

“So what are the risks? They are effectively infinite, but key ‘predictable’ risks that might disrupt this primary trend include policy risk. A key role of central banks has been to ensure economic stability. Previously, this meant curbing inflationary pressures, as in the 1970/80s that was the key destabilising force. Clearly, things have changed and central banks are increasingly focused on asset price inflation. That said, there are areas where inflation is starting to build, albeit not yet to worrying levels, and indeed some inflation, for example a steady increase in wage inflation, should be considered a good thing for economic stability.

“Central banks rightly, remain in the spotlight. They are tasked with raising rates in a still very indebted environment and reducing their material holdings of government bonds, without undermining financial markets. It also seems that we’re entering an unsynchronised central bank rate cycle, compounding the move into unchartered territory, as policy had been broadly coordinated since the Great Financial Crisis.

“Political risk in many countries remains elevated and, while not detracting materially from the primary trend, it’s clearly impacting markets (note sterling’s collapse after Brexit and the subsequent reluctance to rebound, and the ‘Trump trade’ in the US). Both the US and the UK governments seem to be in a permanent state of crisis and there are potential market moving events on the horizon.

“In the UK, front of mind is the survival of Prime Minister Theresa May, the type of Brexit achieved and the potential for a Corbyn victory. In the US, it’s the investigation into alleged collusion between the Trump campaign and Russia, potential for tax reform and nomination of the Fed chair and vice-chair dominate.

“In a period where sector leadership has been so persistent by historical standards, opportunities have been considerable for those investors with the freedom to asset allocate away from benchmarks. For example, to take two extremes (year to date, in sterling), the FTSE developed country telecom sector is down 6%, while the FTSE developed country tech sector is up 28%.

“From a risk perspective, this implies that mean reversion risk is rising by the day and we have been trimming our winners and investing the proceeds into better value opportunities to limit this risk. If we need to take more serious action, for example on the back of a sustained risk-off period, we have the ability to be very defensive in absolute terms as we’re not constrained by benchmarks.”