Inflation risk is top of the agenda, but investors can proactively protect their portfolios by considering commodities and infrastructure - particularly if they choose specific kinds.
Political risk and policy uncertainty become worrisome.
Thematic investing comes to the fore.
Currency movements eagerly watched.
Quality is key in equities selection.
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Looking ahead to January 2017, our expert investment views focus on the influence politics will continue to exert – with the start of Donald Trump’s presidency naturally topping the agenda – along with some pointers for protecting portfolios and even making significant gains from clever stock-picking.
Alex Scott, Deputy Chief Investment Officer at Seven Investment Management, says:
Politics, yet again, clouds the investing outlook. If we could invest simply according to the economic fundamentals, life would be relatively straightforward. The global economy is in reasonable shape: the US is resilient and has decent growth momentum, with wage gains supporting the consumer; the Federal Reserve is responding with rate hikes, but at a very measured pace. Europe has been growing as fast as can be expected, given its challenging demographics. And China has seen a stabilisation in “old economy” sectors, thanks to targeted economic stimulus. Deflation fears have subsided as commodity prices recovered from their February lows.
One might quibble about valuations in some markets or assets, but there would be little doubt that the economic cycle continues to develop, that central banks were supportive and that corporate earnings would continue to grow for a while yet: a rather benign mid-to-late cycle investing environment.
Unfortunately, it’s not quite so simple. Investors face a higher than usual concentration of political risk and policy uncertainty to muddy the waters. We all have our opinions, but we cannot know, and it seems dangerous to build an investing strategy around a very unpredictable political environment.
Markets may fall into the trap of expecting too much too soon. Investors’ attitude to political risk meanwhile can play out in surprising ways: caution ahead of risky, but known, events (such as elections) may be entirely justified, but if investors in aggregate are excessively cautious ahead of such events, the results can be surprising.
Deputy Chief Investment Officer at Seven Investment Management
Tom Becket, Chief Investment Officer at Psigma Investment Management, says:
The key themes we identified a year ago still hold plenty of potential for 2017 and beyond. These themes are “Long Term Equity”, “Equity Recovery”, “Emerging Market Growth”, “Inflation Protection”, “Hunt for Yield” and “Defence”.
To be frank though, it is hard to remember a time through all the combined years that the Psigma Investment Team have been working when the number of potential outcomes were so high – which is a problem when most asset markets to us look “fair value” to “expensive”. At Psigma we pride ourselves on thinking differently to our peers and casting our nets very wide to find an optimal balance between opportunity and risk, and such philosophies will be vital in the uncertain times coming.
Our key views for the year ahead are:
Markets have immediately assumed that President Trump is successful in engineering a break-out for the US economy from the “dull but not disastrous” period post the global financial crisis. We believe there are risks to this assumption and feel many routes are still possible for the global economy.
The best way to avoid the economic and ever-present political uncertainty is to focus on tangible investment themes that should be rewarding, such as Japanese corporate change and Asian consumption, and decent each-way “bets”, such as short duration credit.
Having a clear view of markets, such as that we had at the start of 2016, when we felt that many asset markets were undeservedly cheap, is now perilously difficult. That being said, we have a high degree of confidence in our positioning and strategy, and are excited by the investments that we hold.
Chief Investment Officer at Psigma Investment Management
James Horniman, Investment Manager at James Hambro & Partners, says:
I think we’re going to see currency movements play a really big part in investment returns in 2017, as they have in 2016. Sterling plunged after the Brexit result and has recovered a bit since, but there’s a lot going to happen on the Brexit front in the year ahead and we’re not ruling out another dip.
As Donald Trump’s presidency commences, what will be the impact of his policies on the US dollar? And, with all the elections in Europe this year, who knows what will happen to the euro? I think it will pay to have a globally diversified investment portfolio and there will be opportunities with any currency volatility for the nimble.
While it’s possible to be over cautious, I don’t see this as a year for aggressive investing. Wear a seatbelt – spread your assets, keep back some cash and consider absolute return products. Drive carefully!
Investment Manager at James Hambro & Partners
Richard Champion, Deputy Chief Investment Officer at Canaccord Genuity Wealth Management, says:
At the start of 2016 , not many would have predicted Trump in the White House, a Brexit victory and a huge recovery in commodity prices. There has been a jack in the box around every corner. So what investment trends do we see for 2017?
Quality stocks – does it make sense to buy back into bond proxies after their sell off? Up until the end of the third quarter, the bull market in government bonds had created a parallel trend in quality stocks, or bond proxies. After a lull as valuations in such companies come back to more normal levels, we expect the quality style to resume in 2017. The solidity, high returns and strong cash flows are convincing reasons to own them for the longer term.
Chinese year of the rooster: it is likely the property rally in China will end, but we don’t think a slowdown will revive hard landing fears for the economy. Undoubtedly there’s a requirement to rebalance the Chinese economy, but we would see any negative market reaction to economic concerns as a potential investment opportunity.
Valuations – how to keep the party going in 2017: there’s potential for reasonable returns from shares in 2017. Equity markets have held up well given recent political shocks. According to Quest® (Canaccord Genuity’s proprietary equity evaluation tool), earnings growth over the next 12 months is forecast to be 9.2% for US larger companies, 9.1% and 9.4% for UK larger and smaller companies respectively, and 9.1% for big European companies.
2016 has been a bumpy year, but markets have proved resilient. And the bumps are probably set to continue in 2017 – having your wits about you will be infinitely important.
Deputy Chief Investment Officer at Canaccord Genuity Wealth Management
The investment strategy explanations contained in this piece are for informational purposes only, represent the views of individual institutions, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment decisions.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.