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Liontrust fund managers’ scariest charts

Posted in [Fund Managers' Blog] By Liontrust Managers
As Halloween approaches, Liontrust’s fund managers highlight the most frightening data they’ve come across in their research

Worries ahead for importers

Anthony Cross, fund manager, Economic Advantage team:
“The weak pound is driving up costs for companies that have to import goods. Investors in companies lacking pricing power – who won’t be able to pass on the cost increase - should be worried. The chart shows that the UK’s FTSE General Retailers sector has already weakened to reflect the increased cost of importing goods. Last month, Associated British Foods – owner of Primark – gave warning that retail margins will be squeezed at current exchange rates. We have built our investment process around the identification of companies with durable pricing power.”

Pound/dollar rate & General Retailers sector relative to UK Market

When America sneezes…

James Inglis-Jones, fund manager, Cashflow Solution team:
“The cyclically-adjusted price/earnings (CAPE) ratio smooths earnings to allow share price valuations to be more easily compared at different points in the economic cycle. On this basis, the US is currently one of the most expensive markets in the world. In our international mandates we are very mindful of this and have limited (and mostly value) exposure to the US. From a broader global perspective, as the US accounts for around 60% of the MSCI World Index it is unlikely that other global equity markets would be unscathed by a US correction from these high valuations.”

US CAPE ratio 2006-2016

Bondholders beware capital losses
John Husselbee

John Husselbee, Head of Multi-Asset:
“UK government bonds – one of the most popular traditional ‘safe havens’ from market volatility – are now selling off (meaning that their price falls and yield rises) after a multi-year bull run. As a standalone asset class government bonds is one of the most expensive ever. But investors have chosen to hold them for their diversification and downside protection benefits. However, following the post-referendum fall in the Pound we are seeing imported inflation and rising rate expectations – meaning bondholders are beginning to suffer capital losses, not capital protection.” 

UK 10 year government bond yield

The inconceivable could happen in Italy
Olly Russ

Olly Russ, fund manager, European Income: “
For those suffering from referendum overload, Italy’s December 4th vote on political reform might have so far passed unnoticed. What makes the possibility of a ‘no’ vote scary is that it could conceivably lead to early elections which, in turn, could see the anti-establishment and anti-euro party the Five Star Movement in power. When one considers the carnage which ensued when the UK decided it no longer wished to be part of a customs/political union, imagine how markets would treat the prospect of a eurozone member deciding to leave.”

Latest Italian referendum polls

Beware the scare of rising inflation expectations
Jamie Clark

Jamie Clark, fund manager, Macro team:
“Many income investors seem unprepared for the scare of rising inflation expectations. The lack of yield arising from the impression of permanent easy money has encouraged herding into equities with fixed-income characteristics. Consumer Staples are a case in point. The recent bump in inflation expectations and corresponding pull back in such bond proxies, suggest the trade is on borrowed time.”

Inflation expectations and consumer staples

China’s property bubble shock
Patrick Cadell

Patrick Cadell, fund manager, Global Equities team:
“There is currently a property bubble in Tier 1 (Beijing, Shanghai, etc.) and Tier 2 (Tianjin, Chengdu, etc.) Chinese cities which bears close resemblance to the A-Share equity bubble of 2015, which resulted in market turmoil & was transmitted globally. Both are the result of excessively loose credit conditions and a widespread expectation of government support in case it all goes wrong. Borrowing at the household level in China is relatively contained and thus poses little systemic risk. However, investors in the shares of highly indebted property developers should be aware that they are in fact the weak link in the market.”

China tier 1 cities, average property price per square metre

Global Water Shortages
Hugo Rogers

Hugo Rogers, fund manager, Liontrust GF Global Water & Agriculture fund:
“Increased population and rising per capita consumption are expected to lift global water usage about 60% by 2050, according to the UN, but current global water sources are inadequate to meet this demand. Water levels in Lake Mead, behind the Hoover Dam, for example, have already fallen 150ft since the year 2000, a 30% drop that leaves the lake half empty. Without the introduction of significant water conservation policies, technology and infrastructure, this is a frightening predicament for the 20m people it supplies.”

Water levels at Lake Mead, feet above mean sea level
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