Each week, a professional investortells MoneyWeekwhere he'd put hismoney now.This week:JonathanCunliffe, chiefinvestment officer,Charles Stanley.
Since the financial crisis, Western central banks have been the main driver of returns in risk assets, such as equities. Near-zero interest rates and bond buying have encouraged investors to take more risk, which has worked quite well for many years. However, since the start of 2016, many asset classes equities, emerging markets and corporate bonds have come under pressure.
The backdrop is worrying. Fears over China's economy and the oversupply of oil have hit cyclical stocks and commodity producers. Elsewhere, investment-grade and high-yield bonds have so far failed to provide a safe haven as an alternative to equities. So are there any opportunities for responsible risk-taking in this environment? We think there are.
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Low inflation means there is limited scope for policy "normalisation" in the UK and US.In other words, interest rates will be "lowerfor longer", which should ensure that cashwill continue to burn a hole in investors' pockets for some time. And with US rate expectations now somewhat lower, theprospect of a weaker trade-weighted USdollar could also relieve the pressure on emerging economies and, as commoditiesare priced in US dollars, commodity marketsin general. This should help stem the tide ofrisk aversion that has threatened to engulf financial markets. The Bank of Japan's recent decision to cut rates below zero has certainly helped with this.
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Investors who have cash to put to work should, given the backdrop, at a minimum consider investing in a combination of long-dated gilts (UK government bonds) and shorter-duration corporate debt. One way to implement the latter is via the Kames High Yield Bond Fund, which offers exposure to sterling and overseas high-yield bonds, with these hedged back to sterling.
The high-yield sector has been hit by distress in energy companies, but the fund has a very low weighting in energy and benefits from a broad spread of sector-led and bottom-up stock picks. With a 5.5% yield and a duration of less than four years, the fund affords considerable protection against a rising rate environment, should that be what transpires.
Another interesting opportunity is British Land (LSE: BLND). The company is currently on a forward yield of 4% (more than twice the level of ten-year gilts). The property group is underpinned by real-estate investment trust dividend rules (it has to pay out the majority of its profits as dividends) and a discount to its net asset value of roughly 20%.
It benefits from long lease duration, a well-positioned retail portfolio, sites that stand to benefit from Crossrail, and a continued imbalance between supply and demand as the UK economy remains relatively resilient. Brexit risks must be considered, but the current pricing does reflect some of the closeness of recent polls.
A resilient business model and solid defensive characteristics leave British American Tobacco (LSE: BATS) well placed to weather turbulent markets. Strong pricing power, global reach and popular brands should help offset the ongoing drop in industry volume and currency headwinds.
Along with scope for further margin improvement and support from recent merger activity, the market expects earnings growth to rise to around 6% in 2016.Its forward price/earnings ratio of 16.8 represents a modest discount to its closest peer, PMI, and the 4.4% yield is underpinned by solid cash generation.
