There is no doubt that inflation will be stoked by the reduced buying power of the pound abroad. Should this not lead to higher wages, it will compound the above effect. Apart from the introduction of the living wage there seems little likelihood of wholesale wage inflation. Higher inflation coupled with higher bond yields in the US could feed through to a similar situation here, or at least the fear thereof.
Tactical balance
For the short term it is sensible to hasten slowly. The tactical balance should be on capital protection with exposure more to value than growth. Not only should this lead to a smaller drawdown in the event of a correction but it should also mean that the portfolio is well placed to benefit on the following upturn.
Bottom-up opportunities have started to emerge as a result of the sector rotations that have occurred and continue to occur since the Brexit vote. Where such opportunities arise, it will be important to concentrate on companies that can demonstrate a sustainable top-line profit, healthy free cashflow and growing dividends without excessive gearing.
In summary, for the foreseeable future fund managers will have to demonstrate they are at least up with the curve if not ahead of it. To do that it will be best to concentrate on the smaller, more agile funds, with managers who not only have a good record in the circumstances now extant but also have ‘some skin in the game’.
These are few and far between but well worth seeking out. They are unlikely to be covered by the third-party rating firms, thus extra effort is needed – but the reward will be that of happy clients.
