Investing through a winter of discontent

The term “Winter of Discontent” was used in the opening line of Shakespeare’s play, Richard III, published way back in 1597.

It was also used to describe the period between November 1978 and February 1979 – coincidentally the coldest winter in 16 years – when high inflation led to widespread strikes as workers in both the UK’s private and public sectors demanded higher wages.

Sound familiar? With strikes in the offing, inflation coming in at 10%, and thermostats being turned down due to the escalating cost of energy, there are indeed some parallels.

With such a difficult outlook, investors might be wondering what they should do next.

“There is no easy answer,” says Darius McDermott, managing director FundCalibre. “Liz Truss begins her premiership in an extremely troubling period for a country that’s battling a cost-of-living crisis, the effects of the ongoing war in Ukraine and declining growth.

“Both she and the new Chancellor, Kwasi Kwarteng, will be announcing how they plan to help individuals and businesses with some of these issues this week, with tax cuts on the cards.

“But it leaves the question of where you should place your bets in an economy that has rarely been plagued by so much uncertainty.”

Pick the right stocks

Picking the right stocks could help. In an environment of high inflation and slowing economic growth, markets typically favour businesses with strong balance sheets that are less sensitive to the general economic environment.

These include consumer staples companies – businesses that provide the day-to-day necessities people can’t live without – health care and infrastructure firms. “Consumer goods companies often tend to provide bear market protection because, regardless of how the overall economy is faring, families will continue to buy essential items such as food and toiletries,” said Darius.

“Take Unilever, a top ten holding in Fidelity Global Dividend* and CT UK Extended Alpha**, which has healthy cash flows, a strong operating margin, and steadily growing revenues. It has a robust portfolio of consumer products across multiple price points which will ensure a steady flow of demand for goods. It will also likely benefit from the declining value of the pound as it sells its products globally.

“Infrastructure spending on things likes roads could also help stimulate the economy, while healthcare will still be prioritised regardless of economic and market cycles,” continued Darius.

FundCalibre has four Elite Rated Infrastructure funds: First Sentier Global Listed Infrastructure, M&G Global Listed Infrastructure, Schroder Digital Infrastructure and VT Gravis Infrastructure Income.

Polar Capital Global Healthcare Trust, Polar Capital Biotechnology and Polar Capital Healthcare Opportunities are Elite Rated offerings in the healthcare sector.

“Energy stocks are another option – companies like BP and Shell, which are holdings in Artemis Income** and Waverton European Capital Growth** respectively – or US energy companies like Chevron Mobile, a top ten holding in Cohen & Steers Diversified Real Assets  fund**, which has good cash flow and there is no risk of a windfall tax,” continued Darius.

M&G’s Randeep Somel says that while this winter will likely be tough for consumers and industrial companies alike across Europe, “we should be in a much better position this time next year as our energy imports will not be so concentrated from a single producer and the infrastructure is in place to provide for greater flexibility.”

Hugh Sergeant, manager of ES R&M UK Recovery fund, is also more hopeful of the near-term outlook. “I see Liz Truss as a recovery PM”, he said.  “We have lots of amazing things as a nation, but post Brexit and Covid we are under-earning from all the great people and assets that we have, and we are under- confident.

“She becomes PM when things are very difficult, with the narrative that this will make her job impossible, but actually recovery managers love that as expectations are so low, and there are clearly policies that can be put in place to alleviate short term pressures and, more importantly, that can significantly improve long term growth and give us some confidence back.

“She has appointed a much more business and City ‘friendly’ Cabinet than most of her recent predecessors, but to be delivered by a diverse team that clearly are not ‘out-of-touch’ Tories. We will see but perhaps it might be a positive surprise.”

*Source: fund factsheet, 31 August 2022

**Source: fund factsheet, 31 July 2022