Inflation, rising interest rates and a move to fiscal stimulus policies are short-term themes FE Alpha Manager Leigh Himsworth has identified for his four crown-rated Fidelity UK Opportunities fund. 
Earlier this week, the manager outlined the changing macroeconomic landscape, with bond yields expected to rise and inflationary pressures brought back into the market.
“I think it is important to recognise where we’ve been, how we’ve got there and where it takes us because it means there is a significant change needed within the portfolios,” he said.
As such, he has broken down his portfolio into themes, both in the shorter and longer term, which he believes he can exploit through a number of different avenues.
“What I try to do on an ongoing basis is to invest in a variety of investment themes from very short term to very long term and I try to play them through companies of different maturities – big companies with small companies – to manage the risk in the portfolio,” Himsworth (pictured) said.
On a short-term basis he has tried to play the expected move in bond yields through financials and bank stocks.
The manager said: “You could use Lloyds as the perfect example where in the crash they were forced to get together with Halifax to bail them out and clearly got into their own problems as a consequence of that.
“[As such, they] didn’t really want to do anything for a few years until they had sorted out their own balance sheet.”
As well as this, the government took a big stake in Lloyds in an effort to stabilise the bank, but since then it has now has sold out of its position with the bank in much ruder health.
“All of a sudden the bank is happy to lend again and you can see also that consumer borrowing is picking up significantly from a negative period for a number of years,” he added.
Performance of stock over 10yrs
Source: FE Analytics
This has yet to translate into returns, with the bank still some 67.13 per cent below its pre-financial crisis levels, though it is 211.79 per cent ahead of its lows in 2009.
However, he expects interest rates to rise and inflation to pick up which should benefit the banking sector as a whole in the shorter term.
“What you want for the banks is an interest rate or a yield curve that is ‘normal’ so if you borrow short-term it costs you a lot less than borrowing long-term because there are more risks,” Himsworth noted.
“The banks succeed in that environment because they borrow from the Bank of England at much lower costs than lending it out for a mortgage so their net interest margin is the difference between the short- and longer-term rates.
“In normal times that works well for the banks so with a modest amount of inflation, an improving outlook for the future, this should be perfect for the banks to borrow cheaply and lend out a little bit more expensively.”
The manager also includes Barclays and Aviva, as well as a number specialist financials, with the sector making up 22 per cent of the fund.
Another short-term area he has identified is rising inflation, with CPI [consumer price index] running ahead of the Bank of England target and RPI [retail price index] at the top end of 3 per cent.
Performance of RPI over 5yrs
Source: Office for National Statistics
“Food retail works with inflation on the basis that if you and I go in to a supermarket today and buy our tin of beans we pay the inflated price, whereas Sainsbury’s pay Heinz 60 days later on the old price, so the inflation works very well for supermarkets.
“Equally, when we go in we don’t know whether it is simply Marmite that is affected by price rises or it is a range of items within the supermarket, so Sainsbury’s will generally raise the price of everything and benefit very well into that environment.
“Modest inflation is great for the supermarkets,” he added, noting that while this is true for all of the UK chains, he has backed Sainsbury’s.
The third short-term theme highlighted by Himsworth is the move away from central bank monetary policies to more fiscal stimulus.
“We are seeing the emphasis politically away from monetary stimulus into fiscal stimulus because we have run out of ammo with monetary stimulus,” Himsworth said.
“It was quite a sea change when Theresa May said with her own words that the emphasis is moving more towards fiscal stimulus.
“We are already seeing it in the UK with Hinkley Point, Crossrail, HS2 all getting going as well as road programs so the fiscal stimulus is there.”
The manager is using a number of different firms to play this theme, ranging from housebuilders to on-site equipment providers.
Himsworth said: “Polypipe is a company involved in piping and so they can cope with all of the needs from domestic plumbing through to an asset drain pipe for a water company.
“[Meanwhile] Breedon Aggregates is a great way to play any road or rail building programs because they will all need an aggregate base and Breedon is one of the best in the UK.”
Performance of stocks over 1yr
Source: FE Analytics
As the above shows, as central banks have ramped up the rhetoric around the need for fiscal stimulus, both stocks have performed well.
Over the last 12 months, Polypipe is up 74.88 per cent and Breedon Group is 30.85 per cent ahead.
Himsworth also highlighted greenfield infrastructure project investor John Laing and infrastructure group Balfour Beatty as two other ways he is playing the increased fiscal policy theme.
In an upcoming article next week FE Trustnet will look at the long-term areas the manager is looking to invest in.