According to Long, inflation is likely to surprise on the upside in the second half of the year, as wage pressures continue to grow and oil at current prices begins once more to be inflationary by year-end having been sharply disinflationary for the last few months.
“It is not impossible that this coincides with much improved growth as weather effects in the US roll off, some of the benefits of the lower oil price start to impact the US economy (the negative effects are usually felt before the positive), seasonality kicks in and in China the strength of the stock market starts to have a positive impact in terms of wealth effects (interesting to note we have just seen the strongest mortgage growth in China for three years),” Long writes in the fund’s latest fact sheet.
Adding: “Were it to happen, this would have a further inflationary effect and knock on impacts on yield curves. At this point we are probably more convinced on inflation than we are on growth but will be watching developments closely.”
Given these expectations, Long, and his co-manager, Nick Judge, have recently begun to look closely at the mega cap resources sector.
At 9.5% and 6.4% of the fund respectively, Shell and BHP Billiton are the fund’s two largest holdings, primarily because of the recent actions taken by management, which Long says demonstrates a much more proactive approach than these firms have become known for.
“We are pleased to see much more aggressive actions from commodities businesses, from a micro perspective we like what management is doing. On top of that earnings momentum has improved as prices have rallied somewhat. We think we have now seen the inflection point in earnings momentum,” Long said.
The other area wherein Long sees a lot of opportunities is in the financial sector, which is likely in the short term to get a boost from the result of last week’s election.
“We are now on the road to getting regulatory clarity for the banks which is a positive for the sector. And, as bond yields move higher, so the yield curve will continue to steepen which will also be beneficial for banks,” Long said.
But, while he is positive on the longer term outlook and expects growth to pick up in the second half of the year, he remains cautious in the short term and, as a result, has pushed his cash weighting to just over 10%.
