Inflationary fears form the backdrop to good indicators for several markets and sectors, but there are robust defensive moves investors can be taking to mitigate the risks.
Equity and bond markets stay high.
On balance, equities still seem a good bet.
Investors ponder global growth rates.
Company fundamentals gain greater import.
Stock markets may be riding high, but wealth managers are tempering their equities enthusiasm carefully. Here, leading professional money managers tell us how they foresee the investment landscape developing.
David Batchelor, Associate Director at Smith & Williamson, says:
Global equities have produced stellar returns over the past year, so investors are naturally asking themselves whether now is the time to reduce exposure to the asset class. However, whilst some caution is clearly warranted, and future returns are likely to be more subdued, retaining significant exposure to equities still, on balance, seems the right approach.
Partly, this is due to the question of ‘what are the alternatives?’ continuing to have no obvious answer. Cash still returns nothing, whilst bonds don’t offer any obvious value. There are some interesting possibilities available in the alternative assets space, but these should continue to only account for a minority of overall exposure for most clients.
The attraction of equities is also, however, a vote of confidence in the asset class itself. Much of the recent rally was driven by stretching valuations, but recent earnings reports – particularly in the US – demonstrate the overall health of the corporate sector. Therefore, shares are not obviously overvalued and should move higher over the long-term.
In addition, some of the clouds over the global economy have recently begun to clear. The global economy appears to be in good shape, with Europe’s recovery particularly notable. Recent elections in Holland and France have produced market-friendly results, whilst investors continue to give Donald Trump the benefit of the doubt. Risks clearly remain, but equities are still the asset class to hold.
Associate Director at Smith & Williamson
Thomas Becket, Chief Investment Officer at Psigma Investment Management, says:
Our thoughts on the future path of global GDP have changed little over the past few years, with ‘solid, but unspectacular’ fast becoming our motto, as we continue to see global growth in and around the 3% marker.
Unsurprisingly, the focus remains on Trump’s ability to ‘make America great again’ being a determining factor of GDP growth surprising in either direction. His pre-election promises to bolster economic growth to over 4% per year and create 25 million new jobs certainly would move the needle higher. However, early signs have disappointed, with the first quarter of the year seeing the worst growth reading in three years, backed by stalling industrial production and retail sales data. Our view is that the Q1 data is somewhat of a blip, with growth picking up moderately as the year progresses, although falling noticeably short of President Trump’s optimistic target.
Chinese GDP growth of around 6.5% remains a key pillar in achieving strong global growth, with China accounting for around a third of global GDP growth in 2016. Our view had been that 2017 would be a solid year, given the 19th Party Congress in November and a desire from Chinese authorities to keep things ticking along nicely with as little disturbance as possible.
Europe has seen a surprisingly strong start to the year as it recovers from years of lost growth. Undoubtedly, the efforts of Mario Draghi and the ECB have helped push growth higher, but with the proverbial ‘kitchen sink’ well and truly thrown at it, the ability to keep growth at current levels seems somewhat optimistic.
Meanwhile, the UK appears to have been treading water since our decision to leave the European Union. Rising inflation and stagnating wage growth have cemented our view of low, yet positive growth.
Chief Investment Officer at Psigma Investment Management
James Horniman, Partner and Portfolio Manager at James Hambro & Partners, says:
When the Brexit camp won the referendum to leave the EU last year the fear was that Britain was the first in a line of dominoes. With the political extremes – left and right – apparently in the ascendency and a spate of elections imminent across Europe, it seemed others might follow Britain’s example.
Macron’s Presidential victory means the EU project looks safer. However, there are still parliamentary elections in France to come in June and German elections in September, so no-one is getting over-exuberant.
Economic conditions in much of the world are improving and though markets generally are at record highs they continue to climb the famed ‘wall of worry’.
Supportive monetary policy is likely to continue in Europe a while longer and relatively speaking Europe (and Japan) would seem to offer the best value. Little surprise that Europe appears to be investors’ most favoured region at the moment and reported European hedge fund data suggest that investors have reduced their short positions and the average net long position has moved to the top of the five-year range.
We are neutrally positioned on equities and take the view that, other than at extremes, valuation alone is not a trigger for asset allocation changes. Some of the short-term political risks in Europe have eased, but we have no plans to increase exposure to Europe further at this stage.
With the valuation of many equity and bond markets leaving little buffer if fundamental factors were to deteriorate, our approach is to focus to a greater extent on individual company strategies than on regional arguments. There are still good individual opportunities out there.
Partner and Portfolio Manager at James Hambro & Partners
Richard Champion, Deputy Chief Investment Officer at Canaccord Genuity Wealth Management, says:
Markets over the last month have churned sideways in the face of politics, which is all investors seem to be focused on at the moment. The French presidential election, the Dutch elections and the announcement of a snap General Election in the UK all came in quick succession.
At the start of the year, things were looking a little shaky, but now there is a more certain outlook. The victory of Emmanuel Macron and the defeat of the main populist party in Holland seem to indicate the rise of populism is slowing. And Prime Minister May appears on track to increase the Conservative Party majority in the UK, which will create a more certain outlook for her Brexit stance.
The main result of this activity has been a sharp recovery in both sterling and the euro. The signs are that momentum in Europe is growing, with unemployment falling and activity accelerating. In the US, unemployment is at a cycle-low level of 4.5% and indicators continue to point to robust growth.
For markets, this reinforces the expectation of further increases in interest rates, and with equity and bond valuations still high, it’s going to be hard to make strong progress from here into early summer.
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.