viewWaverton Investment Management

Waverton's James Mee still long on equities, but looking for the tell-tale signs of economic distress

“The biggest risk to all of this is if the policymakers are perceived to have lost control,” he told Proactive. “We don’t think we are there yet.”

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The erratic behaviour of US President Donald Trump, who, after seemingly suggesting we imbibe disinfectant, is now munching through anti-malaria tablets to stave off coronavirus, may be cause for amusement.

However, this and the seeming cack-handed way in which the UK is stumbling its way through the pandemic, have started to ring alarm bells among serious stock market investors.

James Mee, of the Waverton Multi-Asset Income Fund, has these cautionary words for our world leaders.

“The biggest risk to all of this is if the policymakers are perceived to have lost control,” he told Proactive. “We don’t think we are there yet.”

Bumpy few months

His fund is still long on equities after a bumpy few months for the global markets, but, in common with most investors, he is looking for the tell-tale signs of economic distress.

One of the key indicators, Mee reckons, is the US unemployment rate, which currently stands at 14.7%, but looks destined to head above 20% imminently.

Important in that statistic is the number of Americans that are temporarily unemployed versus those who are long-term out of work.

As the millions in the latter category creep up, so do the worry levels, says Mee.

He appears to share the view of Federal Reserve chair, Jerome Powell, who over the weekend suggested that it will take some time to emerge from recession.

In other words, we won’t see the V-shaped rebound in economic activity touted by some of the more optimistic commentators.

Weather eye

This weather eye on the recessionary storm clouds is just part of the job for Mee, whose multi-asset income fund is focused on delivering consistent sustainable returns.

Founded in 2014, its investment objective is to provide holders with a reasonable level of income and maintain the real value of the capital over the medium to long term.

According to Mee, he looks to generate capital growth of 2.5 percentage points above cost price inflation over the full economic cycle, while delivering a dividend yield of 3.4-3.5% without taking excessive risks.

When the Covid-19 outbreak in Wuhan, China, began to emerge as a threat in January, Mee and his team took a pre-emptive option out that essentially bet that credit spreads would widen, and in February Waverton began to reverse out of equities and into cash.

The allocation today is such that the cash position has unwound as opportunities have presented themselves, though Waverton’s equity allocation remains below the 50% level it was pre-pandemic.

And, while the fund is currently long equities, it is hedging, Mee reveals.

Policy response 

Assessing the policy response to the crisis, he reckons state aid such as job protection policies are currently simply replacing lost demand.

The stimulus is being provided by government liquidity injections, which, while good for financial assets such as stocks and shares, has a ‘low multiplier’ effect on the real economy.

Governments’ inability to entice the consumer out from hiding could have long term recessionary ramifications, Mee believes.

“We are coming into possibly the worst economic crisis in 100 years and the policy response – both fiscal and monetary – is not necessarily stimulative,” he explains.

While the fund manager is quick to stress he is not a thematic investor, he sees beneficiaries emerging from the corona-crisis.

The work-from-home trend will be hastened by Covid-19, he reckons, as will demand for online shopping.

While he expects the credit card companies to have a “rough few quarters” as a result of the inevitable global recession, he sees the likes of Amex, Visa and Mastercard as the long-term beneficiaries of the cashless society. “They are likely to compound out of this.”

Chipmakers such as TMSC, whose wares are ubiquitous, are only going to get bigger, Mee adds. “Working practices will change fundamentally; the world is changing fundamentally.” Indeed.

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