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My three big calls: Peter Askew on Europe, healthcare and inflation

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At this point, it is interesting to reflect on the year so far. After a turbulent first quarter, risk markets have generally performed well, notably emerging market equities, which have outstripped other asset classes, rising by almost 15 per cent in sterling terms over the six months to mid-September. It is easy to forget that EM equities were largely unloved at the end of 2013 and in Q1 this year.

While EM equities took first prize over those six months, the ‘risk-on’ rally that started midway through Q2 has, at the time of writing, left virtually all major indices in positive territory for the year so far, with the US S&P 500 and Nasdaq leading the way. Only the Nikkei is in negative territory and not by much. 

Even UK gilts posted a 6 per cent plus return in the year to date. That rally makes markets a little more expensive than they were and while we are not predicting a sharp sell-off, it pays to be careful with one’s investments at these levels.

European ABS

While high yield bonds suffer from new issue indigestion, retail outflows and the occasional Phones4U event, European Central Bank president Mario Draghi has given a boost to European asset-backed securities. 

His explicit reference on 4 September to purchasing these securities under the ABS purchasing plan  was the start of quantitative easing by the ECB and the expansion of its balance sheet. 

Given that the purchasing plan will be a meaningful part of this trillion-euro expansion, it will form a formidable backstop to European ABS yields. 

Healthcare

The healthcare sector has endured a lot of volatility, mainly as the result of a large sell-off prompted by lofty biotechnology stock valuations bid up by momentum buyers. The subsequent indiscriminate sell-off proved to be a good buying opportunity, with the healthcare sector now up 12.63 per cent for the year to date to the end of August. Our preferred fund, the high-conviction Polar Healthcare Opportunities, was up more than 20 per cent during that period. The ‘living longer’ theme should benefit the broader healthcare sector for years to come.

Inflation linkage

Although data continues to be mixed in developed economies outside continental Europe, the overall trend is upwards and inflation expectations are likely to move in the same direction.

With rates at current levels there is little appeal in government debt. Which assets then offer some explicit or implicit inflation linkage? While index-linked gilts would be a natural home, they are not cheap and most carry too much interest rate risk. The desire is to limit interest rate risk (duration) and recent launches such as the M&G Global Floating Rate High Yield fund are intended to meet that demand. Similarly, the SQN Asset Finance Income fund, launched as an investment company in July, aims to provide regular income through investment in essential equipment leased to businesses, providing an implicit inflation link and a low correlation with other asset classes.

Peter Askew is co-manager of the T. Bailey Growth, Dynamic and Defensive funds

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