However, in the end [the equity positioning] came down to the fact that “all of those macro issues actually hadn’t really worsened, many of them were the same as they had been [the same time last year]. Therefore, we felt that reading something into the market wasn’t the right thing to do, because the market is a sentiment barometer and not necessarily an economist.”
Down on debt
Sarasin is quite heavily underweight bonds – the positioning looks completely different to the benchmark – due to the firm being uncomfortable holding high levels of government debt.
“A 10-year gilt yield today is about 1.36% to 1.37%; that is an incredibly low level and I don’t really think it offers any value at these levels,” Walker says.
“The returns that investors have made during the past 10 years are actually not possible to make out of government bonds in the coming 10 years. Although there are tail risks out there, we do own a little bit of government bonds as a diversifier, but we don’t feel the returns over the long term are going to be attractive for the coming decade.”
Sarasin & Partners has been big buyers of infrastructure via investment trusts for the past five years or more. Being an area that has done well, Walker says the firm keeps a close eye on those vehicles to make sure that they still offer attractive value. One of its more recent is SQN Asset Finance Income, an asset leasing fund. Offering a yield of around 7%, it has been added across the firm’s multi-asset portfolios.
Sarasin has also been positive on Europe and Japan during the past couple of years.
“The view of our economist is that there’s an opportunity from the liquidity that will inevitably arise from the looser monetary policy that you see in Europe and Japan. In addition, they have been much cheaper markets so the combination of being able to find more attractive markets and the helpful central bank backdrop was very handy. Finally, in Japan, you have the structural aspect of an improving corporate governance side.”
Big in Japan
‘Abenomics’ is inspiring Japanese company management to look after shareholders, an interesting dynamic which is encouraging in Walker’s view. Historically, the discount that Japanese companies had in terms of a lower return on equity is dissipating and she believes we might start to see Japanese companies compete globally on this basis.
So there are a number of reasons for being positive on Japan, the most recent being the oil price, of which both Europe and Japan are large importers. “With the oil price at its current level, it provides a helpful boost to their consumers and economies,” says Walker.
The oil price is also something that is debated in policy meetings. Sarasin’s energy analyst believes that, ultimately, it is not likely to return to what we saw a few years ago but its equilibrium level will be slightly higher than it is today.
The firm is watching closely whether Iran will cut supply, but Walker has her doubts.
“We do not think it’s likely given that they have had sanctions on them for quite some time, but it is a tail risk and something we are monitoring. Our energy analyst is certainly talking to as many people as he can in the region.”
With regards to the US, business confidence is an important factor because inflation expectations have fallen markedly, and that is ultimately the Federal Reserve’s job to control.
“The falls we have seen in inflation expectation really should cause the Fed to be rather more dovish with their rhetoric. We think that consumer confidence is reasonable in the US and that the oil price will be a boost, although it hasn’t been as much of one as we’d expected.”
Currency calls
On this side of the pond, Sarasin is choosing to play a potential Brexit by being neutral both on the UK and sterling. That could change between now and June, but at the moment the wealth manager finds it prudent to stay neutral.
“Right now, Sarasin follows two key currency calls. The first is overweight dollars, which I am sure we would all accept is a consensus call. We have trimmed it back slightly this year when the dollar has moved so strongly against sterling but still retain a mild overweight to dollars.”
The other currency position is to remain underweight both euros and yen, linking back to the loose monetary policy argument in Europe and Japan referred to above, indicating a weaker currency in Walker’s view.
