PSigma income fund manager Bill Mott believes that the UK is facing three economic scenarios and that the best way to tackle them is by investing in defensive equities.
He has a large portion of the fund invested in “economically insensitive strong cashflow sectors”, such as telecoms, utilities, pharmaceuticals, tobacco, food retail and consumer staples.
He says the most favoured outcome for the market is anaemic growth with a gradual global rebalancing. This would see a greater reliance on net exports by countries with big deficits, such as the US and the UK, and increased domestic demand by emerging countries.
Mott says this rebalancing can only happen slowly as higher spending and high-deficit advanced countries will need to deleverage their private sectors. He says the expansion of domestic demand will offset the consequent drag from net exports.
He says: “If this global rebalancing is achieved successfully, it will be accompanied by anaemic growth as the structural changes to economic models cannot be achieved overnight.”
Mott says his portfolio would flourish in this scenario but that defensive equities also protect against the other two scenarios, global inflation and deflation.
The deflationary scenario will mean bonds are still offering good value while defensive equities would be a safe haven. He says the inflationary outcome could have major drawbacks both for bonds and commodities.
He says nations that embark on quantitative easing could see their currencies weaken dramatically as investors and speculators raise commodity prices.
He says: “The nightmare scenario is that QE leads to a spike in the price of oil and other commodities and that in turn leads to imported bad inflation of the debilitating kind, which then shatters the anaemic recovery.”
He adds that emerging economies would suffer from the inflation caused by higher commodity prices.
He says: “QE could cause commodities to balloon, then correct sharply. The countries implementing QE may not do themselves much good and could succeed in imposing chaos on the rest of the world.”