David Coombs and Will McIntosh-Whyte, fund managers of the Rathbone Multi-Asset Portfolios and the Rathbone Greenbank Multi-Asset Portfolios:
We enter 2022 very much as we entered 2021. But our portfolios are positioned for UK inflation to be higher for longer. We think peak inflationary fears will come to a head around the end of Q1/beginning of Q2. Until then, there will be a lot of volatility. The Bank of England is going to be under a lot of pressure to raise interest rates, which we think would be a mistake, but they will probably do it anyway, albeit dependent on the ongoing covid situation. The market is going to be really worried about central bank policy errors. Consequently, we are going into the new year with very high cash balances, almost no exposure to corporate bonds and with an equity portfolio full of companies with pricing power and long-term visible growth.
With regards to the coronavirus (COVID-19) situation, there is no value in making predictions. As we have seen of late, there could always be a new variant creating problems – we don’t know if there will be lockdowns next year and what the impact that would have on growth. We must be cautious, and we must be flexible, in case markets get hit by the global economy potentially going into a shock recession. If the equity markets corrected due to the factors mentioned above, the Nasdaq and S&P 500 put options in the portfolios would kick in, which we would sell and reinvest and take advantage of the volatility.
As for key investment themes, climate change is a concerning factor and yet markets are still struggling to define what it means in the short-to-medium term. We need to strip out all the noise. There will be new technologies whether in energy, manufacturing or transport which the market will get excited by at times. Some will be very successful, and some will be spectacular failures. We need to be very circumspect and not get carried away.
Should volatility dissipate and Omicron prove to not be a game changer for how the pandemic plays out from here then we also feel the balance we added to portfolios with the high-quality cyclicality throughout the end of 2020 and 2021 should enable the portfolio to benefit in an environment of continued cyclical recovery.
Noelle Cazalis, manager of the Rathbone High Quality Bond Fund:
As we approach the end of 2021, inflation pressures continue to worry markets. Price pressures broaden in most major economies, and we expect inflation next year to stay elevated forcing central banks to act on their promises to raise rates to contain inflation. Worries about inflation’s capacity to undermine the post-pandemic growth rebound are also growing, especially as some European countries embark on new waves of restrictions due to a sharp rise of COVID cases.
As a result, we expect rates’ volatility to continue. Shifts in interest rate expectations led to a sharp repricing at the short end of the gilt curve in September – these moves present opportunities for us to lock in higher yield. Overall, we see risk in rates market yields as skewed to the upside, particularly at the long end of the curve. To help protect against these, we have recently sold our longest dated credit and reduced our duration.
As for credit, a moderate rise in rates should be manageable for spreads. The default outlook is benign and recovery rates have improved this year. We expect that to continue next year as policy, overall, remains accommodative. However, as valuations are somewhat stretched, there is limited room for spread narrowing compared with last year. Stock picking remains key. We continue to favour bonds issued by financials that are well-capitalised and should benefit from a steeper yield curve.
