- Rathbones co-CIO Edward Smith helps oversee $80 billion of client money.
- In an exclusive interview, he also set out his stance on wealth managers investing in crypto and the metaverse.
- He's not bullish on all things tech, however, and lays out the parts of the sector to avoid.
This year is poised to be a fascinating one from an investing point of view, as markets hopefully put the pandemic in the rear view mirror, while wrestling with concerning levels of inflation.
Opinions among experts are split as to whether markets are heading for another good year, or a turn for the worse as investors hang on every word said by Federal Reserve head Jerome Powell and other top central bankers.
2022 is also set to see further adoption of crypto as a recognized asset class among the world's top investment firms, with the metaverse being a big driver of this, alongside NFTs and decentralized finance (Defi).
One top money manager with strong views on all of the above is co-chief investment officer at UK wealth manager Rathbones, Edward Smith, who helps run $80 billion of client money.
Smith's overall outlook is generally bullish, but he does have some concerns about the markets as the new year gets underway.
"Last year was an absolutely stellar year for for growth and for profits. Earnings growth came in at about 50% and that was clearly much more than was anticipated," Smith said.
"A year ago, in fact, consensus estimates were for half that amount of profit growth, but the corollary of that supercharged year has been higher inflation and now the big worry is: what's the trade-off between growth and inflation going to look like with inflation reaching a three-decade high in the US?" he said.
While concerning, there is a key reason the inflation spike may not trouble markets greatly, in Smith's view.
"We think that excess inflation is primarily about the unusual composition of household spending. Consumer inflation rose in line with outsized expenditures on goods, and that is falling. Spending on services hasn't recovered to the same degree and that's that's an unusual factor in this. In a recovery usually services recovers first," he said.
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"Spending on consumer services fell during the pandemic, but prices didn't fall. That downward rigidity has lasting consequences, which means that as spending on services recovers prices aren't likely to rise with it because they didn't fall in the first place."
Smith said the crucial respite in inflation should give central banks cover to tread very gently on rate rises, which will mean equities have further room to run up, broadly speaking. He also pointed out that some monetary tightening is already 'baked-in' to asset prices due to signalling from the Fed.
Within the stock market, tech stocks have dominated the agenda in recent years and there are growing numbers of voices saying the sector is ripe for a sharp correction. Smith has a more nuanced view, however.
"We are certainly not ditching growth stocks, or tech. We still do like a lot of the mega-cap tech names in the US. You only have to avoid the very frothiest names. You may need to avoid the top 10% of growth stocks in order to outperform the benchmarks, and actually a lot of the biggest tech companies don't fall into into that top 10%."
2022 - the year of the metaverse?
Turning to the subject that has become red hot over the past year and looks set to stay that way in 2022 - crypto - Smith says he is very open minded.
He is yet to be convinced it should be part of the portfolios of serious investors, and his hands are somewhat tied by the regulator, but Smith said he can see a route to investing in digital assets in the future.
"At the moment, the regulator makes it very difficult for us to invest retail client assets directly in crypto, but obviously plenty of institutional investors are getting involved."
Crypto is often centered around a battle of narratives. One of the most popular is the concept of 'digital gold.'
"Some investors are allocating to crypto because of what you might describe as 'digital gold' reasons," Smith said. "Now, perhaps one day crypto will trade like that, but historically it doesn't have correlation with inflation or gold, and it doesn't offer diversifying potential, because its correlation to equity markets in times of stress is pretty pretty high."
Where Smith does see potential for crypto to be added to client portfolios is as a small, purely speculative play for investors that are comfortable with higher risk that are seeking to add some bigger returns than those available in traditional markets.
Away from bitcoin, the metaverse is the hottest part of the crypto market at the moment. For now, it's not investable for Rathbones, but Smith says he's is open to the possibility of digital land and property becoming part of portfolios in the future.
"I think us investing is probably a bit down the line from here. But if digital land, digital assets can be properly linked to revenue streams that come from owning them, there's no reason why that should be different to owning an actual building on Wall Street or Threadneedle Street, or wherever."
"Similarly there's no reason that NFTs should be considered different to some of the other illiquid asset classes like fine wine, art or vintage cars that some alternative investment managers do invest in."
Smith added that when prices of digital assets like bitcoin are spiking, clients do start the raise the subject, but when there are the inevitable sharp pull-backs, they tend to go quiet on it.