Although UK growth will be slow in 2018 it won’t be as slow as most people think, according to Thomas Miller Investments’ Andrew Herberts.
As such, the head of private client investment management said that the firm has taken a neutral position towards the domestic economy.
Last month the Organization for Economic Cooperation & Development (OECD) said the UK growth would be the slowest of all the G20 countries this year, despite rising its growth forecast upward from 1.2 per cent to 1.3 per cent.
However, Herberts said not only will the UK perform ahead of expectations but there are still good opportunities for investors within un-loved sectors such as the country’s high street retail.
Performance of indices over 1yr
Source: FE Analytics
He explained: “UK high street retail are very cheap stocks, everyone hates them. While some of them are right hates, there are cases when people just said, ‘I don’t want any retail’.
“However, there are still good businesses there, there are still good opportunities if you know where to find them.”
While acknowledging that some valuations have gone too high, Herberts said there are still some pockets where investors can find attractively-valued companies.
He said: “It is difficult to find cheap stocks out there, if you are buying a cheap stock it is going to have a few issues, but it’s a matter of not rejecting all UK high street retail just because everybody hates those stocks.”
Another area that Herberts said the firm is keen on in the UK is the healthcare sector, which will be able to take advantage of current demographic trends.
Indeed, latest reports by the OECD showing a rapid rise in obesity in the UK since 1990s, where obesity levels have increased by 92 per cent, one of the reasons Herberts believes the sector is set to outperform.
“If you look at the facts, and the long-term demographic argument, the population is getting older and the number of obese people keeps growing, so the demand side is going just one way,” he said.
“If you look at how the market has treated healthcare stocks, these have been aggressively sold off to the extent that only in the UK the big pharmaceuticals companies are being priced as if they did have no pipeline.
“They have been priced as if they were never going to bring another drug to the market no one is going to pay for.
“So, there is a combination of fundamental demand with really attractive valuations in the healthcare sector now,” said the head of private clients investment management.
Obesity among adults
Source: OECD Health at a Glance 2017
Other areas that are currently on their radar include insurers and banks, a sector they have been previously cautious on but that he believes should be benefitted from a higher interest rate environment. However, Thomas Miller Investment remains cautious on some interest rate-sensitive areas and are neutral on consumer staples stocks.
When it comes to global markets, Herberts highlighted the importance of keeping an eye on how they react to first quarter corporate data.
“Let’s see how the markets start reacting to the earnings coming through, people expect 17 per cent growth in S&P earnings, he said. “That will tell us whether effectively the recent sell-off has been psychological.”
If, on the contrary, strong earnings are reported and markets don’t react, Herberts noted that it signals investors are worried about “something more fundamental going on”, such as an escalating trade war or inflation.
He said: “This will mean the markets don’t believe we have a long leg of economic growth to come, which will tell us that we need test our hypothesis that maybe is too late in the cycle.
“We’ve got the big tech companies that have been hit quite hard so what we are trying to decide at the moment is whether what we’ve got at the moment is sort of almost a ‘psychological sell-off’.
“People are fully invested; all the good news is in the price: where you go from there?”
When it comes to asset allocation, Herberts said Thomas Miller Investments has retained its underweight position in fixed interest as many risks remain although he is “happy to keep waiting” before returning to bonds.
He noted that the firm is broadly positive on alternatives given the close correlation of equities and fixed interest but highlighted the importance of finding those alternative assets that aren’t correlated to equities.
“Infrastructure for example has done really well but probably because you couldn’t get this income in fixed interest,” Herberts explained.
“If you get private equity in the right age of its maturity it can give you a decent return, almost but not entirely uncorrelated to the equity market.”
He added: “We’ve got to the point in private equity where you’ve matured your assets and you are selling them off but you have to choose the right fund that’s got the mature private equity assets in it so they are in the right part of the cycle you want to buy into.”
Herberts said long-term strategic asset allocation is the most important decision taken by allocators at Thomas Miller Investment.
“We lean heavily on our insurance business because they have lots of actuarial resources that we can use to help us build our strategic asset allocation,” he said.
The next step they follow is tactical asset allocation, where they spend much time trying to work out where in the investment cycle markets and whether they should be making shorter-term calls. These both feed into the final fund selection process where the team make bottom-up decisions related to the type and nature of funds at hand.