Finding places to hide

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Jobs data will be a key indicator for what’s next for markets, says Real Return manager Suzanne Hutchins. This is where she thinks there may still be opportunities.

Calling it one of the worst economic backdrops in her more than 30-year career as an investment manager, Newton’s[1] Suzanne Hutchins says there are still opportunities to be had. The manager of BNY Mellon’s Real Return strategy believes areas like healthcare, defence, infrastructure, renewables and gold are places to shelter from current market downturn and volatility.[2] A market backdrop she describes as second only to 1932 and one that may get much worse in the months to come.

Hutchins attributes the volatility being experienced to many different factors: central bank actions (and inaction), greater retail participation in markets and tighter regulations. The latter means investment banks are no longer serving as a banker of last resort, thereby curtailing traditional liquidity in some assets.

However, that doesn’t mean there haven’t been places to shelter amid the volatility. Hutchins says that while the ESG violators and dirty carbon emitters have been good performers so far this year (to mid-May), they aren’t the only opportunities to find returns under challenging conditions.

While acknowledging the oil price is likely to be higher for some time, Hutchins says the Real Return team has moved away from direct plays in this space. Noting they do have some select exposures, she favours companies with exposure to the energy transition story. Pharmaceuticals are still a defensive play, as is healthcare as a whole, and that is bearing up well, she notes. Even dentists look interesting, she adds.

We’ve significantly changed the portfolio into more income value and defensive plays but with respect to tech we still see opportunity in the senior citizens in this space – like Microsoft. We also don’t believe subscription (entertainment) services are interesting right now given the cost-of-living crisis means they are likely to be under pressure. Instead, we’re looking at the content providers.”

Hutchins likes some of the stories in the agriculture space, particularly those with pricing power. Noting valuations in this area may look on the rich side, select companies are well suited for a long-term play on the changing and growing agricultural demands already being seen, she says.

Gold, defensive stocks, and other specific inflation hedges, like infrastructure are also useful positions at the moment. Gold was reintroduced into the strategy at the start of the year when the war in Ukraine meant it was a good alternative to fiat money. “Cash is also key in this environment. At around 14% as of mid-May it is not the lowest nor the highest weighting we’ve had. But we think it is vital to have this buffer as it enables us to take advantage of the falls while also helping to reduce our volatility.”

Hutchins says the team has selectively moved back into some government bonds but still is shying away from high yield. Instead the team likes contingent convertible bonds – cocos. While noting the assets are potentially as volatile as high yield issuances, they are callable, have short durations and look relatively more attractive.

With some 18% of the Real Return strategy in securities that will benefit from the tailwind of the theme Earth Matters, Hutchins says the team thinks there is a long-term opportunity in areas like battery providers and electrification beneficiaries including copper. However, she cautions against getting too caught up in potential hype. “Valuations matter, particularly now. We are avoiding leverage at all costs.”

Inflation expectations

Is a recession inevitable? Hutchins says potentially. “I think undoubtedly the Fed was behind the curve in October and inflation is out of control. But in the US alone there are 11.5 million jobs available for the 6 million unemployed – it’s a job seekers market.” As such the probability of a US recession this year isn’t high but she can’t say the same for the UK and Europe.

Hutchins believes we are at a pivotal point with respect to inflation. Expecting it to be as high as 8.5% this year but it is the rate of change of inflation that is key and may have peaked. Hutchins warns this will destabilise markets unless the jobs markets in the US, UK and Europe deteriorates significantly. Inflation and the cost-of-living crisis in the US and elsewhere, will make policy makers lean towards tightening further financial conditions at the cost of the equity market, she adds.

[1] Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA), BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA, BNY MFML or the BNY Mellon funds.
[2] The value of investments can fall. Investors may not get back the amount invested.

992628 Exp: 31 August 2022

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