Juan Nevado, manager of the M&G (Lux) Dynamic Allocation Fund, is convinced time has come for a major rotation towards value stocks. He has aligned his tactically managed portfolio as such, while almost completely avoided US tech.
Today, 40% of the portfolio is allocated to equities, almost a neutral weighting for the fund. ‘Thanks to the improvement in macro figures (including the significant increase in industrial production), the Biden victory and the rollout of the Covid-19 vaccines, an economic recovery in the second half of the year is more likely,’ says Nevado. ‘The cheapest markets are therefore likely to perform best. These include some Asian markets such as Korea, Taiwan, Japan and Singapore, but also some European markets such as the German and Spanish stock markets and, of course, many emerging markets.’ And the FTSE 100, which is very value-driven, should not be forgotten either. ‘Mining shares, which will respond positively to rising commodity prices, should also do well.’
The manager is convinced that we are only in the early stages of a rotation to value. ‘This move has undoubtedly received additional momentum now that the Democrats control the House and Senate. It is obvious that there will still be a larger fiscal boost than before. And also in the UK and in Europe, through the EU recovery fund, governments will up spending. This will bring money into the pockets of consumers who will, at some point, spend this.’
Nevado has therefore resolutely opted for value and cyclically sensitive market segments. ‘We have a preference for the typical value sectors like healthcare [?] and banks, and given the prospects of a global economic recovery, the banking sector is our main overweight. Value versus growth is really cheap and non-US equities in particular will benefit from this.’ Nevado hopes that the rotation to value will manifest itself in the next six months. ‘And if we’re right, then it will come down to reducing this exposure again in the second half of the year.’
US tech: bubble in the making
In October last year, Nevado increased his position in US equities to 15% as macro figures improved and the average valuation had become more attractive. He even took on some additional exposure to US tech stocks at the time. ‘But over the past few weeks we have reversed course and reduced our US equity position to 10% while reducing our US tech holdings, which had done very well, to barely 1% of our portfolio.
‘A large part of the US technology sector seems to be forming a bubble anyway, and the average valuation has simply run too high.’ He it’s telling that profit growth in the tech sector, which outperformed the market average in the first half of 2020, has been behind the rest of the market for months now. He therefore believes that it is dangerous to overweight the sector. Nevado points out that technology as a whole still has a weight of 6.5% in the portfolio though. ‘Most technology companies are from outside the US and are located in Korea, Taiwan and China, among others. Technology is much cheaper there.’