Investor 91 Asia

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THE INVESTOR CENTRE
OLDFIELD PARTNERS
High Octane
Portfolio grows 35% since February
as investor sentiment improves
Interest rates andbond
yields are nonsensical
and intolerable
MIDOCEAN
Joint manager: Strategic Income
Portfolio has added positions that
look to have lagged the market rally
Themarket shrugged
o concerns over the
UK’s EUexit vote
ORCHARD STREET
Property
Income yield from commercial
property remains attractive
Little signof falls in
occupier demand
since referendum
Jim Wiant and Michael Apfel
N ot much has changed in the UK
commercial property market
since the referendum result. Sentiment
in most letting markets outside the
City has remained largely positive and
many letting transactions negotiated
before the referendum completed as
planned. Since then,we have seen little
sign of a signi cant fall in occupier
demand across the wider market.
While Brexit has introduced risks
and uncertainties into investment
markets, the property sector has not
been over-developed in recent times,
nor is it over-leveraged. Being better
capitalised, the sector should
withstand any economic shocks that
might be down the road as Brexit
unfolds; a better capitalised market is
likely to be a less volatile market.
The core bene t of a long-term
investment in commercial property is
the receipt of diversi ed income from
a broad spread of tenants – income
yield is currently circa 5% per annum,
which is attractive both in terms of
quantum and long-term stability.
The St. James’s Place property funds
are generally invested in better-quality
prime stock with low vacancy, so well
placed to capture future rental growth
and withstand economic weakness.
T he US high-yield market
continued its historical rally and is
now up over 14% year-to-date,
outpacing almost all risk asset classes.
Similar to Q2’s themes, the asset class
has bene ted from a recovery in
commodities, accommodative central
bank policies, global search for yield,
steady US economic growth and
muted global macro concerns.
The market has shrugged o most
concerns, such as the UK’s decision to
exit the EU. Year-to-date in ows into
US high-yield are on pace for its rst
positive in ow since 2012 as the dearth
of global yield opportunities has led to
strong interest in the asset class.
Outside the commodity sector,
defaults remain subdued at 0.53%.
Macroeconomic factors will likely
come back into focus for the rest of the
year with two primary concerns being
higher interest rates and lower crude
prices.The markets anticipate a higher
probability for a US rate hike this year
while a decision by the Bank of Japan
to steepen the yield curve could cause
US rates to rise further. Lower crude
prices have come under pressure
have optimised the portfolio
by selling positions and adding those
that have lagged the market rally.
Since 11 February, a date which we
regarded at the time as potentially
pivotal, the portfolio is up more than
35%,which begs the question:‘How
much more?’What encouraged us in
February was that investor sentiment
was extremely gloomy; that everything
appeared to hinge on whether
recession in the US was looming and
we thought not.
Now the position is somewhat
di erent. Investor sentiment in the US
is verging on the over-con dent; the
big deal in investors’minds now is
interest rates and bond yields.
The current level of interest rates and
bond yields is both nonsensical and
increasingly intolerable.QEmay have
done the trick in averting crisis but
not in stimulating decent growth.
We may now have seen a turning
point in bond yields.This poses a
risk to world equity markets, but we
feel that the valuations of markets,
other than the US, are promising
enough to withstand a limited move.
Richard Oldfield Philip Gadsden
THE INVESTOR | 37