Hardy Managed Portfolios: Rebalance Comment

What’s been happening in global markets

Global equity markets have recovered strongly over the last 15 months since bottoming in March 2020, in anticipation of the economic resurgence post pandemic. Pent-up demand, along with supply constraints in certain sectors, has led to an expected rise in inflation .

The more cyclical or “value” sectors, such as Financials and Mining, have performed strongest since last autumn, but over recent weeks have underperformed the more expensive “growth” sectors, like Technology, by around 7% as investors question whether the economy running ‘too hot’ will prompt a more aggressive stance on raising interest rates by central banks. Indeed, last week the US Federal Reserve indicated that interest rates might rise in 2022 rather than 2023 as previously expected.

Quarterly rebalance

We view this recent relative pull-back as an interesting buying opportunity for value investments and so we have continued to adjust portfolios away from their growth tilt towards more value, as well as investing some of our cash held in reserve for just such an opportunity.

US Equities

We have sold our holdings in the Brown Advisory US Flexible Equity and T Rowe US Equity Growth funds to reinvest into the Premier Miton US Opportunities Fund and Dodge & Cox US Stock fund. This move reduces our exposure to “big tech”, which we feel are fair to fully valued, and increases our exposure to value sectors as well as small to midsized domestic companies which are more likely to benefit from the massive stimulus promised by the new Biden administration.

Alternatives

We have been cautious on the prospects for bonds for almost two years and our underweight has paid off over the last year as yields have risen. Against this underweight, we have been gradually increasing our exposure to a blend of Alternative funds to provide greater diversification to portfolios.

We have therefore used some of our cash to increase exposure to Alternatives further, with a new investment in JPM Global Macro Opportunities. This is a multi-asset fund, with a bias to equities and which can employ hedging strategies to smooth its returns.

Outlook

The Chinese economy has cooled. It was one of the first to accelerate last year, growing sharply in Q2 while the rest of the world only began to recover in Q3-Q4, but the authorities have gradually tightened policy to slow the pace of lending growth. This, together with a peak in US economic growth momentum, has been enough to reduce expectations about global growth but the effect should be short lived. China is simply trying to adjust their economy toward a more balanced growth rate, while in the US we should see a continued strong housing market and high corporate and consumer savings provide further tailwinds.

We have been watching the short US Treasury Bond trade became over-crowded, as well as the weak US dollar becoming consensus and crowded. Both could prompt a rise in bond prices and the dollar, which means value investments might experience headwinds in the short term, but this could provide further opportunities in the months ahead.

The pace of reopening is patchy, but consumers and corporates have significant cash balances to deploy and cyclical earnings ought to be strong. Government spending and the clean energy transition are further important reflationary forces. Strong demand and constrained supply could be inflationary for a number of sectors, such as commodities. In addition, many value sectors remain on attractive valuations relative to their growth counterparts.

So, while we still believe that certain growth sectors are appealing on a longer-term view, the improving fundamentals and more attractive valuations suggest that we should continue to find more opportunities in value sectors over the coming months.

Important Information

This update is for information only and does not constitute advice or a recommendation and you should not make any investment decisions on the basis of it. The views and opinions within this document are those of Casterbridge Wealth at time of writing and may change without notice. They should not be viewed as indicating any guarantee of return from an investment managed by Casterbridge Wealth nor as advice of any nature. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.