Citywire AA-rated James Sym is preparing his European equity portfolios for a large-scale shift in market dynamics, the Schroders manager has said.
In a short investor update, Sym, who runs three funds including the Schroder ISF European Equity Focus fund, said the European market is nearing the end of its current investment cycle.
‘What do I mean by that? Well, this investment cycle has been all about risk free and the price of cheap debt,’ said Sym.
‘Now, we think that’s coming to an end, and I think the catalyst for that is inflation starting to come back from next year, part of which is based around the oil price but also general inflationary pressures in the economy.’
Sym said this has ‘huge implications’ for asset allocators and he believes out of favour areas of the market should be sought out now before the tide turns.
‘That would be things like financials, commodity stocks, telecommunications companies - companies that can really benefit from rising interest rates and the rising inflationary environment.’
Financials is the largest position in the Schroder ISF European Equity Focus, account for 34.2% of the fund against a benchmark allocation of 18.25. This is while telecoms make up 6.7% against a 4.5% allocation.
Conversely, Sym said investors should look to trim ‘bond proxies’ as these would come under increased pressure as inflation and bond yields recover. This means Sym has zero exposure to utilities and only 1% in consumer staples, which compares to a 15.9% index weight.
‘Within the market, because of this change in leadership - this regime change into higher bond yields - I think there’s potential for a huge amount of rotation and some really good money to be made,’ he said.
The Schroder ISF European Equity Focus fund returned 8.5% in euro terms over the three years to the end of September 2016, which is while the FTSE World Europe TR EUR rose 20.49%.
However, Sym has been on the fund since February 2016 and over this timeframe the fund has returned 7.5% in euro terms. This is while the index rose 5.9%.