Investors should expect markets to fall over the medium term due to an inevitable crash in artificially inflated asset prices, according to Nick Clay, manager of the Newton Global Higher Income Fund.
Clay who is the alternate manager of the £4bn fund1, where James Harries is lead manager, says central banks’ quantitative easing (QE) policies, which broadly seek to increase the amount of money in an economy to stimulate growth, have not worked to stabilise markets following their introduction in the wake of the financial crisis.
Since 2009, when the US and UK began their respective strategies of buying up bonds – company and government debt - in what is known as Quantitaitive Easing, equity markets – where investors buy and sell companies’ shares – have seen huge increases in their value.
For example, key equity markets for the Newton Global Higher Income Fund such as the FTSE All Share and S&P 500 are up 97.46 and 130.11 per cent , respectively.
Performance of indices since 1 January 2009 – 31 December 2014
Source: FE Analytics Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and can fall as well as rise due to stock market and currency movements. When you sell your investment you may get back less than you originally invested.
While this restoration of confidence back to markets and those that invest in them has been interpreted in many quarters as a successful effect of QE, Clay says it has only delayed further crashes.
1 As at 31 December 2014
He adds that high levels of debt coupled with an ageing population is also pushing up the risk to markets over the longer term.
“The experiments of QE have not worked and have only achieved one of the objectives, which is to push up asset prices, but have done very little to address structural problems, so basically all they have done is make everything more expensive,” he said.
“We think that this will lead to a fragile backdrop with a lot of possibility for things to go wrong. Investors should be very conscious of this and invest in companies that will weather this backdrop.”
“Ultimately high valuations and low economic growth will lead to a correction in asset prices but in such a distorted world it means we can’t put a time frame on it. It is close to impossible.”
Clay also says most market participants wrongly believe QE in the US has ended and interest rates will start to ‘normalise’ by rising back to historical averages . He warns that low economic growth will abound.
“Our view of the world is against the consensus view that QE has worked and the economy is about to recover or is recovering and therefore interest rates are about to rise and it may be beneficial to invest in companies that benefit from stronger growth.”
He says further to this, because growth is going to be lacklustre central banks will start to pursue more stimulative monetary policy.
“The effect of low growth and continued stimulus is that pressure to shorten investment time horizons for investors and companies continues to grow. For investors, the hunt to replace lost returns from low interest rates and for companies, favouring buying their own shares rather than investing in their business directly (like starting a new project), is simply increasing risk, elevating valuations and causing poor investment decisions to be made.” Clay added.
This pessimistic view of ongoing market strength has meant that the manager has opted to hold a portfolio of shares which he believes will hold up when markets are weak or selling off.
“We believe that we will remain in a low growth environment for the foreseeable future and therefore you don’t want to be investing in companies that are dependent on the acceleration of the economy for earnings. You want to invest in companies that have a more structural basis for their growth,” he explained.
“We choose to have a cautious portfolio where geographically there is little to choose from between many of the major economic regions, as all are facing similar structural headwinds. Instead we are focusing upon the company characteristics which we believe will have more stable yields, although they are not necessarily high growth companies but we believe they will benefit in what will continue to be volatile times.”
Clay says this has led him to shun stocks in countries and sectors that he thinks are dependable on growth remaining high.
“We are avoiding where these effects are most extreme, so we have nothing in southern Europe, Japan and very little exposure to emerging markets. We also have very low exposure to the financials sector and we have almost no banks and no mining companies.”
The value of investments and the income from them is not guaranteed and can fall as well as rise due to stock market and currency movements. When you sell your investment you may get back less than you originally invested.
“Instead, we are overweight (having more invested in a company/region/sector than the comparative index-the FTSE World) – in healthcare, telecoms, industrials and consumer staples like tobacco companies. Stocks with robust business models and steady cash flows will continue to be attractive in a world of continuing low interest rates where they are still delivering an attractive income.”
The fund has not beaten the FTSE World Index – the baseline the fund compares itself against –but is beating the average return in its IA Global Equity Income sector over the past five years, despite its large positions in stocks less sensitive to the overall economy.
Performance of fund, sector and index over 5yrs
31/12/2009 – 31/12/2014 Data from FE 2015
Performance of fund over 5yrs
| 31/12/2013 to 31/12/2014 | 31/12/2012 to 31/12/2013 | 31/12/2011 to 31/12/2012 | 31/12/2010 to 31/12/2011 | 31/12/2009 to 31/12/2010 | |
|---|---|---|---|---|---|
| Newton Global Higher Income fund | 8.77 | 14.78 | 10.33 | 2.54 | 13.31 |
Source: FE Analytics
Calculated using discrete annual quarterly data taking account of fund fees.
Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and can fall as well as rise due to stock market and currency movements. When you sell your investment you may get back less than you originally invested.
The fund’s highest country weighting is to the US – 44.8 per cent – followed by Europe and the UK with 33.1 and 14.5 per cent, respectively, as at 31 December 2014.
Top holdings in the fund currently include Reynolds, Microsoft, Philip Morris and Novartis.
However, Clay says with markets this high, it is becoming harder to find places to invest capital.
“There still plenty of ideas but valuations are high and therefore finding attractively valued income stocks is quite difficult.”
Important Information
Past performance is not a guide to future performance.
The value of investments and the income from them is not guaranteed and can fall as well as rise due to stock market and currency movements. When you sell your investment you may get back less than you originally invested.
For a full list of risks applicable to this fund, please refer to the Prospectus. You should read the Prospectus and Key Investor Information Document (KIID) for each fund in which you want to invest. The Prospectus and KIID can be found at www.bnymellonim.co.uk. If you are unsure which type of investment is right for you, please contact a financial adviser.
This is a financial promotion for Retail Clients. This is not investment advice. Any views and opinions are those of the investment manager, unless otherwise noted. Investments should not be regarded as short-term and should normally be held for at least five years. Portfolio holdings are subject to change, for information only and are not investment recommendations. This document should not be published or distributed without authorisation from BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA).. This Fund is a sub-fund of BNY Mellon Investment Funds, an open-ended investment company with variable capital (ICVC) with limited liability between sub-funds. Incorporated in England and Wales: registered number IC27. The Authorised Corporate Director (ACD) is BNY Mellon Fund Managers Limited (BNY MFM), incorporated in England and Wales: No. 1998251. Registered address: BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Authorised and regulated by the Financial Conduct Authority. Issued in the UK by BNYMIM EMEA Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Conduct Authority.
Issued as at 06-02-2015. CP14226 -06-05-2015(3M).