Liontrust Multi-Asset Quarter in Review - Flipbook - Page 17
Inflation and recession fears dominate but ‘glimmers of hope’ in Asia
Against a challenging backdrop, one multi-asset income manager
we saw over the quarter noted glimmers of hope, particularly in
Asia: ‘Clearly the global cycle dominates economic activity in
the region but we are starting to see a nascent cycle emerge,
especially in China,’ the manager said.
Draconian lockdowns are starting to ease and the Purchasing Managers’
Index (PMI) in China is moving up, despite currently remaining below
50, which indicates a non-expansionary environment. ‘While we
are positive on the cyclical factors, the key issue is whether Asia can
outperform when the rest of the world is hurting,’ added the manager.
Key issues dictating that outperformance include geopolitics and
we spoke to an emerging markets manager grappling with the
question of what sanctions on Russia could mean. This manager
is not surprised by company-level sanctions but believes trying to
isolate energy, with the EU relying far too much on Russia for this,
is more questionable: what does the West achieve by negatively
impacting the European population?
Additionally, this team did not predict central banks freezing billions of
Russian reserves overnight and questions what this means for the world.
A further factor influencing emerging market performance has been
regulatory uncertainty on Chinese technology companies and
another manager we saw said that while we are reaching peak
noise on this, they are not expecting any of the proposals from
Chinese officials to be reversed.
At the stock level, this manager has sold a stake in Alibaba as a result,
for example, halving the position in 2020 and exiting the following year.
‘The Chinese government likes data companies, which should
be more resilient – Tencent has a more diverse earnings stream
and overseas investing has been successful for them,’ they added.
‘Nevertheless, we are finding more best-in-class leaders in Taiwan,
South Korea and Australia.’
Staying in this region but changing asset class, we heard from an
emerging markets debt (EMD) manager, who said this area has been
cheap and is looking even cheaper after recent events. EMD spreads
started widening in 2021, with many central banks in emerging
economies taking on tightening pain, and it is currently possible to get
a 7% yield, rising to double digits in high yield. This manager said they
are not (currently) worried about default rates given record profits and
EMD investors are getting paid purely for the uncertainty in the region.
Moving closer to home, we spoke to a quality growth UK manager
to discuss how investors can deal with the rising cost of living;
while they said there is no perfect hedge against inflation, this team
continues to believe equities are not a bad option and can do a
decent job over the long term, albeit with short-term drawdowns as
we have seen recently.
‘The delta of the inflation surge has been difficult to handle, which is
making companies cautious and reluctant to raise guidance as they
do not know what will happen next,’ the manager said. ‘Typically, our
companies are seeing wage inflation of 2-4% but software developers
are getting 5%. In this environment, it is helpful to have higher margins
and the average gross margin of our portfolio is over 50%. Other
features that should help defend margins are loyal customers, high
repeat revenue, and low capital intensity and debt levels.’
To end on a more sobering note, a strategist we saw present over
the quarter feels the big picture suggests we are in a synchronised
downturn around the world. ‘If we take the pillars of growth, namely
consumption, investment, trade and government spending, it is hard to
see economies exporting their way out of the slowdown’, they said.
‘Government fiscal stimulus will probably not be forthcoming as
it could compound the inflation problem,’ the strategist added.
‘Finance costs have shifted much higher so the continued expansion
of investment seems optimistic, but then we are left with consumption,
which is already under pressure with household spending having to
rise. Overall, we could be looking at quite a pronounced slowdown.’
Liontrust Multi-Asset Funds and Portfolios Quarterly Report: Q2 2022 - 17