He says the issue may be that the Federal Reserve will “continue to put rates up until something breaks”, and he notes that almost all of the gains that have occurred in the S&P 500 have been from seven stocks.
He says rate rises will eventually dent the corporate earnings of US companies, something he notes has not happened yet but which he believes is inevitable as rates rise.
Cook is keen on Japanese equities as he feels corporate reforms are happening there that will boost returns, motivated both by pressure from policymakers and also by the fact that Japan has had inflation for the first time in years.
He says: “The thing with Japan is that, companies there, because inflation and bond yields have been so low for years, there was nowhere else for investors to go, so they didn’t really enact the reforms, but inflation now means they can get some return from elsewhere and that alters companies behaviours.”
Miller is more sanguine on the outlook for Japan, describing it as a “trading market” that comes in and out of fashion depending on market sentiment towards the corporate reforms.
Iggo’s view is that in a world of higher interest rates, the key is to avoid companies that have high levels of debt or which constantly need more capital to expand.
For this reason he is keen on technology companies, which have those characteristics, while mining companies tend to require extra capital at regular intervals in order to open new mines.
Alternatives exposure
Vincent McEntegart, co-manager of the Diversified Income strategies at Aegon, has halved his alternatives exposure over the past year as bond yields have risen.
His fund is run with an income focus, and as such he ventured into alternatives due to the yields on bonds being so low, but with bond yields higher he has moved into the fixed income space.
He adds that many of the alternative investment trusts that gained popularity over the past decade or so have high levels of debt, which makes them unattractive as interest costs rise.
David Storm, chief investment officer – British Isles and Asia at RBC Wealth Management, says one should always have an alternatives exposure, but that many assets which are badged as alternative do not perform in that way.
He says: “Traditional asset classes are sensitive to economic outcomes, while alternatives can provide real portfolio diversification independent of the path of interest rates.
"As an explicit example, generating returns from energy markets in Texas is impacted by the local weather and not the Fed. That is true diversification and very useful at times of heightened uncertainty."
