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March 10, 2023updated 14 Mar 2023 8:30pm

Waverton defies market gloom with reasons to be cheerful

By Will Wainewright

Both stock and bond markets offer opportunity in 2023, says the UK investment house at a market outlook forum

Gloomy headlines about possible recession, UK companies moving their stock listing to Wall Street, a cold snap and even fruit and vegetable rationing in the shops.

Yet Waverton Investment Management, the UK wealth adviser, made a bullish case on the market outlook and opportunity set at its investment forum on Thursday.

The forum’s title? ‘Reasons to be cheerful’.

Dodging recession

Chief investment officer William Dinning said recessions either sides of the Atlantic were not a foregone conclusion and that consumer resilience in the face of rising prices was a positive.

Spending power has been given an important boost by the impact of the sharp fall in energy prices since last year, helping consumers cope with inflation elsewhere.

His words were backed up by a British Chambers of Commerce (BCC) forecast that the UK, though in the midst of weak growth, is on track to dodge a technical recession.

Celebrations, however, would be premature. ‘The UK economy is pretty stagnant and the outlook for the housing market remains pretty grim,’ says Dinning.

Central to his optimism on the equities outlook was that investors in the US and UK have become more cautious on the interest rate outlook — with the sense that rates will peak and even fall later this year driving the January rally.

Few still believe that.

Market outlook: realism on rates

’The market is now much more realistic about where short-term interest rates are going in the US,’ Dinning adds. That leaves space for a positive surprise if hiking is slower than now expected.

He sees a ‘similar story’ in the UK. The housing market slowdown makes him ‘sceptical that the Bank of England will raise rates three more times,’ adding fuel to his sense there is room for an upside boost to equities. The China re-opening theme could also add a ‘positive impulse.’

‘The stock market still has opportunity in it and stock-picking is the critical way we are navigating the current environment,’ he adds.

Active management is firmly back on the agenda after last year’s sell-off brought the post-2008 bull ride to an end — and signalling a new market paradigm of volatility ill-suited to passive investors.

Riding the railways

Where to invest? Head of equities Jennifer Fisher said Waverton’s preference in these volatile times was companies that can generate free cashflow over the long-term.

Free cashflow gives the best sense of a company’s financial strength, rather than earnings figures, for instance, which can be manipulated. Strong free cashflow means you are not reliant on credit or external funding to support growth, says Fisher.

Waverton bought and added to a position in Canadian Pacific Railway, the North American railroad company, last year.

Fisher said its durability and competitive advantage over peers made it a prime example of a Waverton holding.

Canadian Pacific Railway train

Its proposed merger with Kansas City Southern will give its network unparalleled reach, she added. ‘Synergies from the proposed merger have been underestimated.’

It will be a ‘major beneficiary’ of the onshoring trend in the US as firms look to keep supply chains closer to home and have a good opportunity to grow free cashflow from a revenue perspective.

She also pointed out that emissions from trains versus truck were far lower, giving it an ESG quality. Railways are four times more fuel efficient than trucking, the only feasible alternative.

Bullish on bonds

Switching to the bond market outlook, head of fixed income Jeff Keen said his ‘brief today to be cheerful’ could be hard ‘because I am paid to think about downside risk.’

But the timing is good. ‘I am probably more positive today on bonds than any moment in the past 20 years,’ he says.

With real yields now very much back in positive territory, meaning interest rates over the next 10 years are forecast to top inflation, bond investors can get a healthy return.

‘The prospect for bonds at this point looks pretty interesting,’ in stark contrast to the very poor returns in the asset class last year, he adds.

Bill Dinning, Jennifer Fisher, Jeff Keen

The improved outlook has meant a lot of money has flowed into fixed-income in recent months. A lot of it has flowed into credit ‘which we think is misplaced,’ says Keen.

‘We have focused our flow towards government bonds where we think there is more upside and less downside risk.’ Their focus in credit is on more defensive areas and issuers with stronger balance sheets.

As with equities, an active approach is fundamental in fixed-income — if you take a passive approach you risk lending money to the most indebted governments and companies, adds Keen.

Will Wainewright is the founder of hedge fund and private markets news site Alternative Fund Insight

Cover image: Shutterstock

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