1st February 2016
Richard Woolnough discusses China, oil and allocation within the M&G Optimal Income fund
Elite Rated M&G Optimal Income is a “go anywhere” bond fund with a flexible mandate, which enables the manager to invest in all types of bonds and, importantly in today’s environment, shift the interest rate exposure. The fund can, and often does, invest in equities and also derivatives.
Here, the manager, Richard Woolnough, provides a brief outline of his views on China and oil and comments on his latest portfolio allocation:
“The recent volatility we have seen in the markets is subject to a time illusion; 2016 has brought no change, and it is as volatile now as it has been for the past few years. Investors are seeing stock markets decline and thinking it is bad for the economy. However, what is bad for Wall Street (the home of the US stock exchange) is not always bad for Main Street.”
“Exports to China are less than 1% of US gross domestic product (GDP) and this is largely dominated by food exports, something which is unlikely to significantly slow down. Commodity demand from China will decline, but investors can position portfolios accordingly. If Chinese growth is 5% or 7%, it is still growing. We do not just say 'China weak: world weak'.”
“A falling oil price is positive for economic growth, and the idea that a falling price kills jobs growth is generally unfounded. Volatility in the oil market is likely to continue, but investors should not be focusing on it day to day. Instead, we look at the long term and we are seeing opportunities in investment grade bonds, which the market has punished unfairly in our view.
“Whilst the UK, EU and US economies are all performing well, quantitative easing from the European Central Bank has distorted the European bond market. We therefore have no exposure to European government bonds from an interest rate perspective, finding better value in the UK and US instead. In the future, we may look to increase our weighting to Europe. However, at current levels the risk/ reward trade-off is insufficient to enter the market.”
“The equity market is currently too expensive and the recent decline is a necessary pullback. The Optimal Income fund currently has a 0% exposure to equities, from as high as 12.3% in 2013. We will not look to increase our allocation until the risk/reward premium is greater.”
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Richard's views are his own and do not constitute financial advice.
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