Miton’s multi-asset team has reduced its funds’ exposure to bond proxies as it reassesses its “lower for longer” view on rates, inflation and growth.
David Jane manager of Miton’s multi-asset fund range says the change of government rhetoric away from austerity brings into question whether growth and inflation will remain subdued.
The team has also held its position in gold, while reducing the term of bonds, to provide protection in case excessive government expenditure leads to a return to inflation – despite arguing this was unlikely to impact markets near term given the current state of economies.
“Yields for longer dated bonds, while higher, are not sufficiently higher to compensate for the risk that inflation returns,” Jane says.
Jane says despite Brexit, the tone of markets has been “quite positive” with most stocks reaching pre-vote levels, smaller companies making new highs, bond yields remaining at post-vote lows and cyclical companies outperforming, while outside the UK the tone is similar.
This could become a sustainable trend if government increases spending, particularly on infrastructure, while keeping interest rates very low.
“It has always been our belief that the ‘lower for longer’ thesis was built upon a demand deficiency problem, it was not interest rates that were holding growth back, simply consumers in the western world were getting older and less prone to borrow and spend,” Jane says.
“Unlike previous generations, a smaller group of younger consumers lack the opportunities and incomes to spend heavily.
“Government spending changes could break this cycle, with infrastructure projects creating opportunities for employment and domestic expenditure giving rise to a new sustainable growth path for the developed world, as productivity and incomes return to growth.”
Expanding on the changes to the multi-asset funds, Jane says: “Within equities, we have made a subtle but significant shift in our mix over the past few months, away from some of the more defensive ‘bond proxy’ companies into some of the potential beneficiaries of a more benign growth environment, in particular investment in infrastructure.
“These shifts have to a degree diversified the portfolio away from the ‘lower for longer’ thesis, which feels sensible given the degree to which it is being challenged.”