Axa Ethical Distribution fund manager Richard Marwood has added to financial stocks this month and offloaded almost all traditional gilts on concerns of inflation.
Marwood’s £55m fund has bought shares in Man Group, Icap and Aviva over the past month, believing stocks with a reasonably high market exposure should perform well in this environment.
Last week, the Bank of England revealed inflation could hit 3.5% early this year, before falling to less than 2%.
“If the UK has a real debt problem, it would coincide with a lot of pressure on sterling, which would be inherently inflationary,” Marwood says.
“You have to be mindful of inflation, and it is something investors have to protect against. In inflationary conditions, we would expect shares to do well.”
Over the past six months, Marwood has upped positions in index-linked gilts to 35% and run conventional gilts down from 7% to just 2%.
“There are not many index-linked gilts being issued and they get snapped up quickly when they are, but they are worth buying.
“I do not see much value in traditional gilts. Inflationary conditions would be when index-linked issues come to the fore. Authorities will want to keep interest rates low for as long as possible, but rates in the UK need to rise.”
Marwood says HSBC, the fund’s second-largest holding, could also benefit if inflation spikes – while the bank is also attractive for its exposure to Asia.
“Just because you are cautious about the UK economy does not mean you have to be cautious on UK equities,” he says.
