Fund managers have been making changes to portfolios in response to both inflation and interest rates moving higher. These are the stocks they're buying now.
So far in 2022 stock markets have resembled a sea of red, with only a couple of areas and sectors bucking the trend, such as Latin America, commodities, miners and oil companies.
US markets have sold-off notably in response to technology and other growth shares falling out of favour. The Dow Jones has declined by 14% year-to-date, with the S&P 500 down 18% and the tech-heavy Nasdaq down by 27%.
The FTSE 100 has fared much better, with a loss of just over 1%. Value sectors – oil, gas, miners and banks – comprise a large part of the FTSE 100’s market cap, which has helped to weather the market storm.
UK mid and small-cap shares, though, have come under pressure, with the FTSE 250 and FTSE SmallCap indices down 16.8% and 11.7%.
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With stock market volatility higher than it has been for some time, UK fund managers have been eyeing up opportunities in an attempt to buy shares at a cheaper price.
Year-to-date Kingfisher is down 29%, while Reckitt Benckiser has been treading water, down just 1.5%.
The duo point out that both companies saw their earnings benefit from the pandemic, but argue this boost “has masked more structural improvements”, which has prompted the new positions in the investment trust.
They said: “Kingfisher has steadily improved its French business and continued to roll out Screwfix stores, while Reckitt's has invested in sales, marketing and product development in order to improve its organic growth. In our view these self-help measures will become more evident as consumer demand normalises following the pandemic.”
Noffke has also been adding to other existing holdings that have seen dips in their share prices, defence services business QinetiQ Group (LSE:QQ.) and industrial chemicals business Johnson Matthey (LSE:JMAT).
Elsewhere, Thomas Moore, fund manager of abrdn Equity Income Trust (LSE:AEI), has initiated a new position in Halfords (LSE:HFD), which is down 40% year-to-date. He has also bought Hiscox (LSE:HSX), which is positive territory so far in 2022, up 6%.
Increases in inflation and rate hike protection
Both Noffke and Moore have been making changes to their portfolios in response to both inflation and interest rates moving higher.
Investors were informed: “Turnover in the portfolio has been influenced by our view of increased and enduring inflation risks and associated rises in bond yields, which has led us to establish new positions in stocks we believe are set to benefit from this environment, as well as adding to holdings which we believe will prove resilient in this situation.”
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Moore has also been buying banks – Standard Chartered and NatWest Group (LSE:NWG). He has also been increasing exposure to the energy sector through a new holding in Harbour Energy (LSE:HBR) and increasing exposure to BP (LSE:BP.).
Moore said: “We remain mindful of the need to position the portfolio in stocks that can thrive in an inflationary environment. The tightening conditions that were already driving inflation higher in 2021 have intensified since the beginning of the Russia-Ukraine war as sanctions begin to bite.
“While there will be some impact on economic growth as demand is curbed by rising living costs, we remain confident in our ability to identify businesses that will deliver operational gearing, as revenues grow faster than costs. Our focus on cash flows is helping us to grow the revenue account and, in so doing, protect our shareholders against inflation.
“Our primary focus is to look for companies undergoing positive change, supporting dividend growth that will drive a rapid return towards full dividend coverage. Over time, the companies that surprise positively on cash flows and dividends are the ones that tend to be rewarded with rising share prices.”
The three UK trusts announced details of the new share purchases and additions to existing holdings in their latest half-yearly reports, which were all published last week.
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