He says companies that are not capital-intensive — meaning they can operate without needing to raise new capital — will be the equities that find favour with the market in the coming period.
Anthony Rayner, who jointly runs about £800mn across a range of multi-asset funds at Premier Miton, has long believed that inflation would remain higher for longer, and, as such, has not had much exposure to US technology stocks as he feels they would suffer for being “long-duration” assets at a time of higher inflation.
This is relevant because technology companies are usually expected to generate the bulk of their returns in the future, rather than right now, and so are essentially competing for capital, not just with other equities but with bonds, which offer a return over multiple years that is visible.
So if bond yields rise, then the expectation is usually that technology shares perform poorly.
Rayner says that with yields having “moved quite a bit upwards, maybe towards their peak, we have added a little bit to technology stocks in the US as a result”.
His view on the bigger picture is somewhat similar to that of Caron, as he feels the global economy is becoming “desynchronised”. He says that following an extended period of time where monetary policy, the pandemic and then monetary policy again, economies will now begin to perform radically differently from each other.
Both Caron and Rayner cite the example of Germany’s current economic downturn, relative to recent strong GDP growth posted by the US.
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Rayner’s reaction to these dislocations is, in addition to owning more US technology stocks, to buy “consumer staples” — that is, stocks for which demand is relatively constant and so not exposed to the economic cycle.
These stocks would also be expected to do well in an environment where bond yields have peaked. This is because the income from consumer staple-type stocks is viewed by many market participants as being similar in terms of reliability to that of bonds.
So these types of equities are also competing with bond yields for capital, and if bond yields have peaked that should benefit the equities which most resemble bonds.
Rayner adds that Japan may represent diversification within an equity portfolio, as a combination of currency weakness, the very different inflation outlook, and the travails of the Chinese economy alter investor sentiment.
The Japanese stock market has returned more than 20 per cent this year.
Vincent McEntegart, who runs Aegon Asset Management’s Diversified Monthly Income Fund, takes up the point made by Caron around higher returns on cash and bonds acting as a “hurdle” for equity investing.
