Despite the negative headlines surrounding inflation investors shouldn’t be too worried as the rate at which the general level of prices for goods and services is rising remains contained, according to BMO Global Asset Management’s Kelly Prior.
Prior's comments came as the Office for National Statistics announced that consumer prices index (CPI) rate of inflation had fallen unexpectedly from 2.7 per cent in February to 2.5 per cent in March.
“In spite of all the headlines we are reading, inflation remains pretty much in check,” she explained. “We think this is a very healthy environment, which gives us confidence in how actually things are feeling in the world.”
Prior added: “We have to bear in mind the skill of central bankers. When you look at what the Federal Reserve has done, they’ve done a fantastic job in terms of managing to reverse their position and it’s all about being patient and understanding the psychology of markets and how emotional they are.”
Acknowledging an inflection point where central bankers are “taking the foot off the gas”, Prior said the ‘Goldilocks’ scenario for markets remains intact and that the global economy continues operating in an optimal state.
She said GDP in various economies point at a robust growth backdrop in developed markets, which reinforces her positive outlook for the rest of 2018.
Global economy data
Source: BMO Global Asset Management
“The global growth outlook is looking okay overall; the numbers are strong. What we see looking at the data is that it’s not the case of certain economies doing well and others doing less well,” said Prior.
“According to the International Monetary Fund (IMF) the global growth outlook for 2018 is supposed to be 3 per cent across the world.
“There are just eight countries in the world whose economies are projected to shrink and they are very small economies like South Sudan and places like that,” she noted.
The multi-manager said that not only is GDP data positive, but the purchasing managers’ index (PMI) – an indicator of the economic health of the manufacturing sector used as a snapshot about current business conditions – also supports a robust economic backdrop in developed markets.
“When looking at the PMI, in all cases we still remain above fifty so we are still in expansion mode,” said Prior. “Admittedly figures are slightly down on February but we are still very much in a positive environment.”
In her outlook for the year ahead, Prior noted that, although economic issues – particularly central banks’ movements – are main focus of attention in markets, geopolitical developments also have the potential to influence market sentiment in the coming months.
“We’ve been through an interesting time from a political perspective, which again grabbed all the headlines in 2017 and 2016,” she said. “One thing we are watching very much is the trade war and how that will escalate. But, at the moment, that seems to be in check.”
With that in mind, Prior said the team has decided to use protection across the strategy, which allows them to limit the downside of volatility should there be spikes.
“That protection is something that has worked well for us, but it’s very much done at the margin, as still very much focused on fund selection,” she said. “However, I believe it can be useful in these emotional markets we are involved in at the moment.”
In their outlook for their income strategies, Rob Burdett (pictured), co-head of the BMO multi-manager team said their asset allocation is “low ego” without clear winners or losers but Japan as their biggest overweight. 
He explained: “The Bank of Japan is set to maintain loose policy for even longer, and fiscal stimulus will continue under Shinzo Abe’s new term.
“Furthermore, the corporate and consumer backdrop is improving and valuations remain attractive on a relative basis.”
Asian economies and emerging markets are also areas the team continue to overweight as not only is there scope for central bank loosening, but many issues remain cyclical rather than structural and have favourable debt and demographics compared to developed markets.
When it comes to mainland Europe, Burdett said they are neutrally positioned despite political risk diminishing and encouraging economic data – with the European Central Bank still supportive of markets – as a stronger currency could lead to headwinds.
Among areas they have underweighted, Burdett highlighted that the firm continues to watch the UK closely, as GDP data points at a very slow growth in 2018. They also remain underweight US, where valuations are still a concern despite good GDP figures.
In the fixed income area, they noted a lack of exposure to interest rates to avoid risk is a deliberate strategy in the portfolios.
Burdett and Prior noted: “2017 was a year that was characterised by very strong markets and growth stocks which is a challenge to the Distribution fund and challenging for yield strategies the distribution fund is skewed towards. That explains that number.
“But we are pleased with how the strategy has performed through this period.”
“We have a balance across the portfolio to growth and income funds, we are very pleased with how the funds have performed, particularly trough the volatility in 2018.”
The £1.2bn F&C MM Navigator Distribution fund has returned 10.7 per cent over the past three years, compared with a gain of 10.49 per cent for the average IA Mixed Investment 20-60 % Shares sector fund.
Performance of funds over 3yrs
Source: FE Analytics
The multi-manager fund’s largest holdings include Schroder Income Maximiser, Ashmore Emerging Market Total Return, JO Hambro UK Equity Income fund as well as a range of other equity and fixed income funds.
Indeed, the fund aims to generate a total return with an emphasis on income with some capital growth and, as such, has a yield of 4.80 per cent. It has an ongoing charges figure (OCF) of 1.49 per cent.