Emma Wall: Hello, and welcome to the Morningstar series "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Stephen Bailey, Manager of the Liontrust Macro UK Growth Fund.
Hi, Stephen.
Stephen Bailey: Hi there.
Wall: So, one of the big problems U.K. investors are facing at the moment is the spectre of inflation. Of course, inflation was very high a few years ago. Then thanks to oil prices it's come right back low again. But this year, oil has been rallying. So, should we expect inflation to start hammering our investments again?
Bailey: I mean oil is obviously one of the components of the basket. And to be quite frank, I don't think that we can be too concerned that the inflation is going to come back in any kind of dramatic fashion. We've seen the sort of a rally from the bottom and we do need a modicum of inflation in society anyway. I think the general trend, particularly I think we see from markets is that there is still a lot of disinflation around. We're not suffering from a period of sustained wage growth either. And to be quite frank, I don't think we need to be that concerned about inflation.
Wall: And of course, without inflation it means that it's very highly unlikely we're going to get any interest rate rises here?
Bailey: It is. I think we have to get used to this. I think we're in an environment now where interest rates will remain lower for longer. We're certainly not forecasting we're going to see a rise this year. And I think it might be sort of quite a way into next until we actually may see the first rise. But even then I think any sort of future rise in interest rates is going to be very, very modest and I think that a return to the sort of the normalised rates of yesteryear I think are an awful long way off.
Wall: Of course, this has two sides to the coin for investors. Great that we don't have the eroding effect of inflation battering our portfolios, but without any interest rate rise it means that income stocks are extremely expensive. And you run an income portfolio as well as a growth one. And that has certainly been the case, isn't it? People – there is rush to yield because we're not getting anything on cash and very little on bonds. It means that actually certain stocks are very expensive now?
Bailey: I think there has been a bit of a rush certainly to the defensive income sectors and I would be very, very cautious on sort of paying 22, 23 times earnings for a consumer staples business. History tells me that it's one thing to attain a premium rating to the market, it's another thing to maintain it and this market is very, very unforgiving. Historically, you would expect consumer staples to trade at a discount to the market whilst offering a yield premium. And that was the way of the world up until very recently. And I would suggest that in the fullness of time we will return to a very similar metrics.
Wall: And if we return to those metrics though that means the market correction surely?
Bailey: It's limited to a few sectors. There's still plenty of value in the market. I would be more concerned, I think, as to the expensive nature of fixed interest securities as opposed to stocks. There's actually plenty of value within the market.
Wall: And so, where are you seeing those opportunities?
Bailey: We're looking at telecoms. I think there's plenty of opportunity there. Financials, and of course, financials have had a bad year this year and I think the uncertainty surrounding the Brexit vote hasn't really helped them. But I think maybe in the second half of the year we're going to sort of see the leadership change in terms of the market and I think we may see some of those underperforming sectors starting to perform.
Wall: So, there will be a rebalancing within the U.K. market?
Bailey: I think so. The market these days has become very used to rotation from sector to sector. I wouldn't be surprised to sort of see this sort of change in the second half of the year. The main drivers year-to-date effectively have been those sectors that performed badly last year, mainly oils and mines.
Wall: Stephen, thank you very much.
Bailey: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
