Are bond proxies going to crash?
“The bond proxies – or bond villains as we call them – clearly have had unnatural buyers of their equity in the desperate reach for yield but some of these companies are extremely good businesses and I hold Unilever for example. But I have to say they clearly cannot re-rate any further, it is just about the delivery of earnings growth over the next few years.”
“Almost inevitably they will have a period of underperformance over the next few years if the bond market retreats. It is just a question of how many you want in your portfolio - we’re not that heavily exposed.”
How has the outlook for UK equities changed since the Conservative’s election victory?
“The outcome of the election – a clear majority and a firm government, no shilly-shallying around – that is good news. It is obviously a much more business-friendly environment which is positive, although it is the removal of negative more than an absolute positive.”
“But it is a government that is absolutely – and rightly – committed to reducing the deficit. We are still overspending and so there will have to be belt tightening.”
“So, no plain-sailing but it is at least a business-friendly government.”
Is the market still in a bull run?
“Ironically, in the last five years of the coalition government bonds and equities were pretty strong and went up most years. In the next five years equities will continue to make progress but it is going to be more volatile.”
“They [equities] will continue to make progress because the economy will be growing and other international economies will be growing and therefore profits will be growing. But there will be more volatility because we will have to negotiate the turn in the interest cycle and central banks slowly but ever so surely nudging interest rates and bond yields up and that is bound to cause more volatility.”
What is the biggest risk to markets this year?
“The major market risk to me is the bond market: the process of pulling off the near impossible trick of the Fed starting to raise short rates and encourage long yields to gently go upwards without participating either a real deterioration in economic activity or a very rapid bond market collapse. We have lived through this in the past and it was very damaging to equities.”
“So that to me is the biggest risk out there, rather than the growth rate in China or what’s going on in Europe, Greece or anything like that.”
You are overweight financials. Why?
“I have a big underpinning in financials for a number of reasons. Firstly, banks are continuing their post-financial crisis healing process. A lot of investors are still very wary about investing in them but they continue to make good progress in terms of getting rid of their non-core, bad debt and paying fines for past behaviour.”
“Life assurers will continue to benefit from increased savings flows and new products in response to change of pension rules and the like. All financials generally will continue to benefit from the gradual pickup in bond yields which has actually been a significant headwind to them in recent years.”