Against a much-changed backdrop compared with the past few years, Paul Flood, head of mixed assets investments at Newton, and Alison El-Araby, portfolio manager, look at the challenges and opportunities facing investors.

The past decade has seen a growth bias, one that has become entrenched in equity indices. At the same time, bonds seemingly shed much of their protective qualities, appearing more growth, rather than inflation, focused and with very little diversification.

“We find ourselves in a very different market environment,” explains Flood. “Indeed, we see attractive opportunities to make decent returns in the bond market.”

Investors today are seeking a broad opportunity set to ensure they can invest in the best risk/reward opportunities of the moment – not in every asset class. According to Flood being able to invest directly is imperative and, ultimately, having flexibility is crucial, particularly in a challenging investment environment like we see today, he says.

A changing landscape

Flood says with respect to his multi-asset income strategy, he’s been gradually increasing his weighting to corporate and government bonds (particularly the latter) as yields have risen. Meanwhile, the team has significantly reduced – almost halved – the alternatives exposure. “We have chosen instead to reallocate resources up the capital structure in the bond market given their attractiveness as an income-producing investment,” he explains.

Within the equity exposure in both the income strategy and the team’s multi-asset balanced portfolio, Flood and El-Araby see opportunity in the technology and industrial sectors. The team believes such areas will be major beneficiaries of increased global infrastructure spending and the trend of reshoring. Meanwhile, the team is underweight areas such as financial, energy and consumer staples. 

Recession looming?

“When it comes to the outlook, it seems fair to say that the economic growth seen this year has come as something of a surprise,” says El-Araby. “Expectations at the end of last year were very broadly factoring in widespread recessions in 2023; however, the combination of real wage strength – keeping pace with inflation – and high household savings have meant that we are seeing quite a lag in the true effects coming through.” While the real-world impact of monetary tightening isn’t quite biting yet, El-Araby expects to see these effects starting to take hold by the end of this year.

Doing what it does best

Against this changing backdrop, the Newton team note two of its investment themes have come to the fore and provide guidance for opportunities. “Our thematic approach is central to all we do,” explains El-Araby. “It helps highlight areas of particular focus within portfolios, as well as those sections of the market to avoid all together,” she adds.

‘De-globalisation’ and ‘Natural capital’ are two such investment themes. For many decades since China joined the World Trade Organisation, globalisation really benefited global growth and supressed inflation, explains El-Araby. “Post-Covid, however, supply chain disruption and the often-related geopolitical tensions between the East and West (not to mention Russia’s invasion of Ukraine) have really changed how companies look at their supply chains.” Indeed, reshoring is a growing trend as companies seek to secure their supply chains and control costs. “Meanwhile, our ‘Natural capital’ theme centres on the energy transition and decarbonisation – looking for those companies that stand to benefit from these powerful tailwinds,” she adds. 

The value of investments can fall. Investors may not get back the amount invested. Income from investments may vary and is not guaranteed.

Changes in Interest Rates & Inflation Risk: Investments in bonds/money market securities are affected by interest rates  and inflation trends which may negatively affect the value of  the portfolio.

Credit Ratings and Unrated Securities Risk: Bonds with a low  credit rating or unrated bonds have a greater risk of default. These investments may negatively affect the value of the portfolio.

Credit risk: The issuer of a security held by the portfolio may not pay income or repay capital to the portfolio when due.

Important Information

For Professional Clients only. Any views and opinions are those of the investment manager, unless otherwise noted. This is not investment research or a research recommendation for regulatory purposes.

For further information visit the BNY Mellon Investment Management website. http://www.bnymellonim.com