As inflationary pressures and the invasion of Ukraine dominate the headlines, Anthony Willis and Scott Spencer, investment managers at Columbia Threadneedle Investments, discuss the market outlook in the second half of the year and outline opportunities for investors.

With China facing low inflation levels, investment managers at Columbia Threadneedle Investments, a US-based asset manager, are quite optimistic about investment opportunities in Asia.

Talking at a media event, investment manager Anthony Willis and Scott Spencer warned of the high global inflation levels, driven by soaring food and energy prices, exacerbated by the war between Ukraine and Russia.

“There has also been extreme volatility on the natural gas market, and this is a key theme in the second half of the year,” Willis said. “Rising gas prices will continue to feed into consumer prices across the world,” he added.   

“The inflation we have right now is the worst kind of inflation as it’s the type consumers can’t avoid,” he said. “It’s energy, its food, and that pain is reflected in the consumer confidence surveys which are extremely weak right now in the UK, Europe and the US,” he stressed.

He said global bonds should have been offering good returns as a hiding place but that has very much not been the case this year. “Bonds have not been the safe haven due to inflation and central banks have to respond to that,” he stressed.

“Bond markets are nevertheless starting to change now,” he added. Property has also been a bit of a hiding place and the firm continues to have exposure to that through specialist holdings and closed-ended listed funds.

“It’s not been an easy year so far. Inflation has been an underlying market theme and it will take a while for the interest rate hikes to kick in. But we are starting to see an economic slowdown,” he added.

“We’re looking for inflation peaking, which might happen in the US sooner rather than later and in Q4 in the UK,” he said. “Central banks are continuing with an aggressive hiking path which they need to, considering where inflation is,” he added. The Bank of England is seriously considering further aggressive rate hikes, after the ECB raised rates. “We see weaker growth in the West going forward which brings some opportunities too,” he said.  

China
“Although China can’t escape from Covid right now, we should see some decent stimulus as they are still targeting 5.5 per cent growth this year,” Willis said.  

The investment managers are fairly optimistic about investment opportunities in Asia in the second half of the year, due to the low inflation levels there, which gives their central banks more wiggle room in terms of policy. The firm is overweight in Asia, as they believe the region is well placed to weather the storm compared with the West.

Europe
In Europe, there is significant risk of recession, especially if Russia turns off the energy supplies, Willis added. But he highlighted that the EU has been diversifying its energy supplies. It reduced its reliance on Russian energy by 20 per cent, and it has urged member states to cut gas consumption, which will fall heavily on industry, he said. Sanctions on Russian energy are also having an impact.

“We are underweight in Europe and are quite defensive in terms of our European exposure,” they stressed.  

Commodities
“We are also more likely to gravitate to government bonds and fixed income going forward, rather than gold as it’s not such a traditional safe haven as it was,” they added.

They said it was a great time to invest in non-gold commodities six to eight weeks ago. “Wheat prices were up over 300 per cent but have fallen back dramatically recently and markets are very volatile,” Willis said. “We have had some decent wheat harvests in Europe and the US and that helped bring prices down,” he added.

Prices are also under further pressure after Turkey announced that a grain export agreement has been reached to free Ukrainian grain exports blocked by Russia in the Black Sea, which is critical for food security.