The bigger picture
On a country level, the house view is underweight the US and UK and overweight Europe. Bateman does not believe the US is hugely overvalued but on a relative basis Europe ex UK is cheap, especially as the spectre of another eurozone crisis has depressed multinationals that are domiciled in Europe, leading to a sentiment depression on stocks.
The other attraction with the eurozone is unhedged currency, because he believes the euro probably has further to appreciate.
Bateman also says the European economy has further economic upswing potential, unemployment will fall and it has an accommodative central bank.
In terms of the UK, Bateman predicts the ongoing Brexit negotiations will weigh on UK domestics. However, whether Brexit is positive or not is irrelevant as it will create uncertainty and “when there’s uncertainty, stocks underperform”. In fact, on a relative basis he sees the FTSE 250 underperforming over the next two or three years.
Fidelity has also moved to neutral on emerging markets having been positive on local currency debt rather than equity. It has trimmed exposure to emerging market debt to neutral on valuation grounds, also with an eye on factors like the increased risks posed to the global economy, question marks over China, as well as uncertainty over the US dollar and policy decisions coming from the White House.
Alternative views
Bateman, like many, believes government bonds have been overvalued for a while and says the only value in fixed income is in investment grade, which at the very least is fair value. An overweight to index-linked reflects his view that inflationary expectations are probably wrong and these assets act as an insurance policy in the portfolio.
The team has also moved into alternatives for their potential to extract pure alpha in a world where beta returns have been good over the past decade. As a consequence, it has looked at property leasing and commercial real estate which, while liquid, is earlier in the cycle than residential, according to Bateman, particularly Europe over the UK. Other alternative ideas in the portfolio include aircraft and windfarm leasing for their ability to deliver an income stream and capital appreciation over time as well as inflation protection.
However, in the case of the latter, Bateman believes these investments require higher due diligence, citing the need to be familiar with counterparty risk, the actual aircraft and take a view on the depreciation curve of an aircraft versus the market. “If you can’t have a long-term view of what your investment can be worth, you need dedicated people looking at them,” he says.
Long/short and “quasi” absolute return funds also feature in the portfolio, although Bateman notes a heightened level of personnel departures in this space, which has necessitated sourcing fresh ideas.
Cash is highly unattractive, given it offers lower-than-inflation returns, but the team does take active FX positions. Recently, short dollar and long euro have been key, although it is “on the fence” with regards to the yen, given short-term tensions over North Korea.
Indeed, geopolitical risk is a short-term consideration, but what keeps Bateman awake at night on a longer-term horizon? He says: “The biggest risk is: ‘what if everything is fine and a bear market is not going to come for longer than we expect?’. We are paid to be worriers and the risk is that things go right and we ignore it.”
