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Goldilocks is dead, says Newton’s Nick Clay

While many investors believe Goldilocks is back and is looking prettier than ever, we couldn’t agree less, says Nick Clay, portfolio manager, Newton’s Global Higher Income team. Indeed, now is the time to focus on quality and capital preservation.

Despite recent market wobbles, the consensus view suggests all is still rosy. The bulls’ argument remains largely unchanged: quantitative easing (QE) has worked and is delivering a self-sustainable economic recovery; QE can now be withdrawn and interest rates will rise in ‘normal’ fashion; investors should buy procyclicals and sell bonds and bond proxies; investors should take on risk until inflation becomes a problem.

We disagree. In fact, we would argue the opposite has happened this year. US treasuries have been the top performers, high yield has sold off, equity market volatility is back and so-called ‘escape velocity’ has failed to transpire. Meanwhile, corporate profits are struggling and deflation, not inflation, is now the concern. What’s more, the IMF recently downgraded its global economic growth forecasts for both 2014 and 2015.

But this shouldn’t be a surprise. Structural headwinds are buffeting the global economy. From the challenges of changing population dynamics to the huge debt burdens dragging on growth, the deflationary effects of a more transparent internet-led business environment, and the steady reversal of globalisation (for example independence arguments and the prevalence of protectionist policies), it’s no wonder we are witnessing a sub-par recovery.

So it looks like this distortive and accommodative environment is here to stay. Interest rates are likely to stay lower for a lot longer than forecasters are currently predicting. This is in contrast to equity markets, which are close to all-time highs and bolstered not by fundamentals but by share buybacks and the misallocation of capital. The high level of debt being heaped upon the global economy is simply bringing forward future demand. The true cost will only be revealed in the goodness of time.

Against this backdrop, we are content to shun those riskier areas of the market. Our focus is on the structural drivers, on areas not dependent upon economic recovery. Through disciplined capital allocation and consciousness of the importance of capital protection, we are happy to stay invested in the calm waters on the quieter side of the harbour wall.

IMPORTANT INFORMATION

The value of investments and the income from them is not guaranteed and can fall as well as rise due to stock market and currency movements. When your client sells their investment, they may get back less than they originally invested.

This is a financial promotion for professional clients and/or distributors only. This is not intended as investment advice. You should read the Prospectus and Key Investor Information Document (KIID) for each fund in which you want to invest. The Prospectus and KIID can be found at www.bnymellonim.co.uk. This document may not be used for the purpose of an offer or solicitation in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised.

BNY Mellon Investment Management EMEA (BNYMIM EMEA) is the global (ex US) distributor for the capabilities of Newton Investment Management Ltd. This document is issued in the UK, Austria and Spain by BNYMIM EMEA, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Conduct Authority. BNYMIM EMEA and any other BNY Mellon entity mentioned are all ultimately owned by The Bank of New York Mellon Corporation. For further information visit the BNY Mellon Investment Management website. Issued as at 22-10-2014. CP13840-22-01-2015(3M)

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