Darius McDermott, investment adviser to the VT Chelsea Managed Fund range, asks whether monetary policy divergence is the answer to the investment waiting game.
They say the best things in life are worth waiting for, but there must be plenty of professional investors who are losing patience as they look for some concrete evidence on the direction of monetary policy, given the influence it has over markets.
This challenge is furthered by central banks not being completely reliable, as evidenced by the US Federal Reserve U-turn in December 2023 (when it announced it was looking at scaling back its policy tightening/rate hiking approach). However, the expectation of rate cuts keeps being pushed back thus far in 2024.
It’s particularly frustrating for us in the UK, where macroeconomic performance has been better than expected. As of writing, inflation in the UK now stands at 3.2 per cent*, by contrast US Federal Reserve chair Jay Powell has said it is likely to take “longer than expected” for inflation to return to the central bank’s 2 per cent target and justify cuts to interest rates. The forecast for rate cuts in the US has now moved to September, with fewer cuts now expected in 2024**.
The holding pattern markets are in appears unlikely to change imminently. What is also interesting is the other side of the macro, namely the impact of the growing geopolitical concerns. The terrible events between Russia and Ukraine, as well as Israel and Palestine, look more likely to escalate than conclude in the current climate.
However, at present markets appear to simply shrug off any geopolitical concerns. This re-emphasises the influence of monetary policy.
At the turn of the year it was all about coordinated cuts, but sticky inflation could change that picture – with policy divergence a possibility. If inflation continues to fall in the UK – increasing the calls/need for rate cuts – there is no reason why the Bank of England shouldn’t go first. I would not rule it out, particularly given the pressure on the mortgage market.
Being paid to wait in fixed income, while specialist opportunities continue to arise
I’ve talked on this column before about the opportunity within fixed income. The potential rate cuts would’ve opened the door for capital appreciation. However, this opportunity appears further down the road (cuts will happen, but when is less clear), but at circa 6 per cent plus for investment grade, the starting yield is much higher and we are being paid well to wait.
As for equities, the main changes to our fund range have seen us top-up our value strategies in the portfolios, as well bolstering our UK smaller companies exposure.
The value exposure has been a case of looking for more balance, as we were heavily tilted to growth. We are still seeing the fallout of being in a completely different environment to the world of low rates we became so accustomed to post the global financial crisis. We’ve added to names like Man GLG Income, Schroder Global Recovery and commodities in general. The UK smaller companies story is a well told one, ultimately there is significant value relative to large-caps and its own history, so we have added to names like WS Montanaro UK Income.
The other area we’ve continued to add to is our specialist investment trusts. Examples include SEEIT, an energy-efficient investment trust; and buying commodities via BlackRock World Mining Trust. The latter cannot be impacted by artificial intelligence (AI), as they are already commoditised. AI means more data centres, and you will need more commodities to address that.
Doric Nimrod 3, aircraft leasing, and WAREHOUSE REIT have also been topped up and bought respectively. We feel there is still a bit of value in the specialist investment trust space, but they did rally at the end of last year, when everyone thought rates were coming down sooner.
Positioned to take advantage
I’d say we are nicely balanced, as we are not positioned for disaster but are taking advantage of attractive income levels on offer, while we play the waiting game. We are not swinging the bat massively when we are thinking of making changes, but we do believe there is definitely the potential for a positive re-rating in some of our investment trusts if the market gets the sniff of a cut in interest rates.
*Source: Office for National Statistics, 17 April 2024
**Source: Financial Times, 17 April 2024
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested. The views expressed are those of Darius and do not constitute financial advice.
Valu-Trac Investment Management Limited is the authorised corporate director (ACD) and investment manager of the VT Chelsea Managed Funds. Valu-Trac is authorised and regulated by the Financial Conduct Authority (FCA). Valu-Trac’s FCA registration is 145168. Chelsea Portfolio Management Services Limited is the investment adviser for the VT Chelsea Managed Funds.
