Premier Miton fund manager David Jane talks to Lee Wild, interactive investor’s head of equity strategy, about stocks he’ll be buying in 2020, popular trades and why it pays to be bullish on UK shares.
[Video filmed on 2nd December 2019]
Lee Wild, head of equity strategy at interactive investor:
2019 has been a mixed year, a bit of a bounce back from a very weak fourth quarter, 2018. So, it's all relative, the stats show it's been a great year, but longer-term investors will know slightly different.
Where will you be putting your money in 2020?
David Jane, Multi-asset fund manager at Premier Miton:
I think when we look at the overall background for 2020, it's reasonable to think it is going to be a year where interest rates remain very low, maybe they'll be on an upward path, but I think the broad background is very low interest rates worldwide, and ongoing Quantitative Easing (QE).
That we can know with a reasonable degree of certainty, which probably provides a very supportive environment for growth stocks versus value. Probably a reasonably supportive environment there for the US.
The big unanswered question is going to be, will the economy be further slowing, or will it be reaccelerating, and I don't think we can be absolutely clear about that. So, broadly, we will be supporting quality growth investments over the course of 2020.
You were talking about interest rates and the economy, and I think there's a general acceptance that we're late cycle, perhaps not end cycle, but certainly late cycle. There's talk that the good times are going to end in 2020, or there were perhaps earlier in 2019, but now there’s a little bit confidence as we're near the end of the year.
But I guess the question is, how near are we to recession, are we a year away, 18 months away? What do you think?
I think that's one of those great unanswerable questions in reality. I think it’s now five years since we've been talking about late cycle, you know, people think about the economic cycles as typically being five to seven years.
But the reality is, there's no date on them, the reality is economies go through expanding periods and contracting periods, but not as determined by the calendar. And so, what we do know is, the economy is expanding at a slower rate than it has been before. Whether that ultimately leads to a recession or not is difficult really to assess.
But what we do know is, recessions are generally characterised by problems in a certain industry. And it's really difficult to identify the large substantial industry at the moment that is going to drag the whole world economy down.
So, there is no colossal problem in financial services, and there's no colossal problem in the housing market. Where is the big problem that we’re going to point to and say, that's causing a recession?
Okay, so if there are no obvious signs that a recession is imminent, regionally, certainly the US tech stocks have done incredibly well this year, again a bit of a bounce back from a weak Q4 2018.
The question again, can the US boom, whether it be tech or otherwise - I know it's tech driving a lot of the upside in the US - keep going through 2020? Election year of course.
And election years are generally up years, you know, that is true. And quite clearly, in an environment where essentially monetary authorities are obsessed with maintaining the upward trajectory of asset markets through the mechanisms of QE and ultra-low interest rates, it is reasonable to think that an overall collapse in areas which perhaps look overvalued, is not massively likely.
So, when we're looking at the more expensive areas of the market, whilst we think other areas will catch up, or they may be slow or lagging, I don't think a collapse of the tech boom like we’ve seen before is that plausible actually.
And, particularly when it's well founded on good economic fundamentals, you know, a lot of the growth in those areas, if we look at semiconductors, or the digital economy, that is ongoing real growth.
You may criticise the valuations, but it’s hard to deny the growth.
Looking elsewhere around the globe, Russia, India, certainly Europe - a bit of a contrarian trade through this year has perhaps grown in popularity. Russia has had a cracking year so far. The UK, again perhaps another contrarian undervalued play.
Which regions do you like in 2020? What do you expect to be the highlights?
I think the answer to that will lie in as we discover the answer to the question, are we reaccelerating or are we further slowing down in the world economy? Because, clearly, if we're accelerating, you're going to have a favouritism for the more cyclical parts of the world economy, or those more dependent on global trade.
So that will guide you towards Europe and Japan. If it's continued slowdown in the environment of ultra-low interest rates, the clear beneficiary of that is going to the US where there are so many growth stocks, so much quality, and is benefiting from the free money.
So, I think the answer to that is going to become clear. We’ve basically been increasing our exposure to Europe and Japan, but much more neutralising rather than making a full on call on them yet.
And I guess a lot of what happens in the UK is going to be driven by what happens with Brexit in 2020. So, assuming there's a resolution and certainty, that gives investors the confidence to invest in the country again?
Quite clearly, investors hate uncertainty, and they put an undue discount on assets where there's uncertainty. And that's really been the story of the UK for three years now.
And it's reasonable to say that big international investors are pretty much max underweight in the UK and have been for some time. It's also reasonable to say that valuations in the UK on a like for like basis, a lot of reasons why the UK looks cheap, is it's a mix of assets, you know, particularly biased towards the resources and so on.
All of those things are true, the UK is clearly cheap. And I think you're absolutely right, once we get a resolution of those uncertainties, the UKs got a long way to catch up. And it will particularly benefit from a reaccelerating global economy as well.
So, quite clearly, I think the UK could have a good 18 months ahead of it once we've got through those various issues.
And in terms of investment themes or strategies for 2020, do you think there are any that are going to become obvious as we move into the new year?
We run a very thematic strategy generally in our multi asset strategy. So, we’ve been following themes such as healthcare and the ageing population, or new energy for a long period of time.
But what's really coming through strongly both in terms of how investment markets are behaving but also how clients are behaving, is the overall ESG [environmental, social, governance] theme, which has gone from being a little bit nichey, maybe like new energy was four or five years ago was seen as a bit nichey, a bit wacky, now has become very, very mainstream in terms of its impact on the economy.
ESG is clearly coming through with the sort of power that indexation came through perhaps five or 10 years ago. And I think it's going to drive a lot of decisions both on a positive and negative side. You know, on the negative side, it's difficult to imagine those heavy polluting industries really achieving any kind of valuation that they have in the past.
On the other side, clearly those companies which can be part of a positive trend, are going to attract a lot of capital going forward. So, I think that's a theme that we mustn't ignore.
I agree with what you say in terms of ethically investing, and the statistics now are showing more that you needn't give up performance to trade ethically. Is that what you’re seeing now?
I think the reality - I mean we’re pragmatic investors and will not be generally driven by any rules - but I think what you can say with a high degree of certainty, is if there are more and more people seeking to invest ethically going forward, there will be more buyers than sellers for ethical assets.
And in the same way as perhaps the drive towards indexation drove the outperformance of large cap stocks over a long period of time, the drive towards ESG and capital markets naturally have this feature; that where there is demand, there will be buyers and the assets will go up in value.
So, the intentions and demands of our end customers to follow more ethical strategies, will drive the success of those strategies. And so, you know, supply, demand, price.
And are you seeing more interest, more people asking you about ethical investments?
If I roll the clock back three to five years, it was the sort of question that came up in client meetings about once a year, if ever. Now rarely does a client meeting go by where that subject doesn't come up in some form or another. And that's driven by our client's end clients, you know, so it’s clearly on a lot of people's minds.
And I guess another interesting discussion that's ongoing, and has been for quite some time, the discussion around active investing versus passive. I know the rise of the passives over the past number of years has been quite incredible. Clearly, I know where you sit on this, but if you could give us a brief discussion around the area?
Well, I mean let's be completely honest about it, I mean Premier Miton (LSE:PMI), we've nailed our colours very firmly to the active management mast. But I get it, you know, if I'm an end investor when, at Premier Miton we can say, well look at these very active strategies we're offering real value for money, a real alternative.
But there was an awful lot of money for many, many years running what you might call semi-passive or semi-active ways, where they weren't offering real value for money, and customers really demand that.
So many of our customers for the fund we run on my desk, they are blending us with passive strategies, and that is fully understandable, because ultimately by blending us with a passive strategy, the clients are getting the same amount of active as they might with a mainstream active fund, but for half the price.
So, this is what's driving it, is value for money, and if active managers don’t understand that they've really got to offer real active value for money by running genuinely active strategies, then they won't have a future.
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