Fund managers from Rathbone Unit Trust Management share their thoughts on what they think will define 2022.
Alexandra Jackson, manager of the Rathbone UK Opportunities Fund:
I saw three (hundred) ships go sailing by…
Rarely do markets focus intently on the same topic for long. By this time next year, we do not expect to be spending much time analysing how many ships are waiting to get into ports across the world. We believe that goods and supply chain-led inflation will ease back substantially. By then, wage inflation may have briefly picked up the baton, leading to more handwringing and rotation between growth and value strategies. However, many times we reassess our own investment strategy, we always come back to growth. Buying growth works when growth is scarce.
Often investors need to pay up for this comfort, this resilience, the simple fact of earnings delivery. This is especially true during periods when the economic outlook is uncertain. But then, when isn’t it? Wherever we look, we see reasons why synchronised global growth is far from nailed on. Unpredictable COVID outbreaks and their knock-on impacts (see the Chinese port shut over a single case), bottlenecks in hiring the right staff, tax increases and Brexit wrangling (in the UK), plus central bank tightening on the horizon. While we navigate these hurdles, we prefer to own the companies that can grow anyway.
And the good news is that in the UK, we can buy growth legends on a postcode-driven discount. If investors are concerned about valuations elsewhere in the world, the UK could offer a rare combination of growth and value. There are structural, regulatory, societal and environmental reasons why large sections of the FTSE 100 are unappealing, not to mention the low and/or volatile returns they come with. Further down the market cap scale, there’s a sector balance more in line with US markets. Valuation is rarely a good predictor of future performance, and so the chunky returns we’ve enjoyed this year in mid cap land certainly don’t put us off. Indeed, the flood of M&A suggests that others are seeing this opportunity too. We expect more corporate activity next year, including M&As and IPOs. So, plenty of stumbling blocks out there but also some huge positives. Oral treatments for COVID should once and for all break the link between cases and lockdowns. UK consumers have an unprecedented amount of savings squirreled away, which can support consumption in 2022. Company CFOs are unleashing a tidal wave of spending on productivity enhancing measures. These are key trends we can buy into and profit from.
Bryn Jones, manager of the Rathbone Ethical Bond and Rathbone Strategic Bond Funds:
Credit markets are likely to see a period of heightened volatility over the next six months driven mainly by volatility in government bond markets. However, we believe we are well positioned for this with our shorter duration positioning and higher carry and anticipate remaining shorter duration relative to major indices without a significant move higher in government bond yields.
On a credit spread basis, we are relatively relaxed about the next six months – policy remains accommodative and fundamentals are, in the most part, strong. That said, we do think credit markets will generally experience higher volatility due to rates’ volatility, and there is the risk that this rate volatility could cause spread-widening. However, our base case is not for a significant widening of credit spreads, and with all else equal, we would likely view any significant widening of credit spreads as an opportunity to add to credit risk. Valuations are relatively tight, but we consider this justified by the fundamentals.
The picture for rates is less clear. The heightened volatility we have seen in rates markets recently will continue, and by extension this will result in volatility in credit markets. To help protect against risk in rates markets, we have reduced our exposure to longer-dated credit and our duration, as a whole, is generally shorter than the sector average/common sterling corporate bond indices. Without a significant move higher in government bond yields, it is difficult to see us reversing this positioning in the next six months, particularly with supply dynamics turning from a tailwind to headwind, as we look to the next fiscal year for gilts. This means our exposure is skewed towards short dated/belly of the curve BBB bonds. The higher level of carry and the rolldown return offered by these bonds will help to reduce the impact of rates volatility. On a sector basis, we continue to find attractive bonds issued by financials, some of which would benefit from rising rates.
