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Six investment themes to look out for in 2018

Global stock markets performed remarkably well in 2017 but are unlikely to be so kind this year, say fund managers.

 
Six investment themes to look out for in 2018
 

Most investors are likely to be pleased with the performance of their investments in 2017. Stock markets shrugged off the uncertainty created by a hung parliament election result, slow progress on Brexit negotiations, elections across Europe and a new regime in the US under president Donald Trump. 

The UK, as represented by the FTSE All-Share index, delivered a total return (including dividends) of 12.3%, which was in line with global markets with the MSCI World index gaining 12.7% in sterling terms.

Asia and emerging markets were the best performing regions for UK investors with the MSCI’s Asia Pacific ex-Japan and Emerging Markets indices both returning over 25%. Europe and Japan followed with gains of over 16% in both the MSCI Europe ex-UK and TSE (Tokyo Stock Exchange) 1st Section indices. 

The US squeezed ahead of the UK with the S&P 500 recording a 12.6% rise with the index achieving a positive total return in every month of last year, a first.

The advances in equity markets came with an upturn in economic growth across Organisation for European Cooperation and Development (OECD) countries for the first time since 2007.

Although the backdrop looks promising, fund managers have warned investors not to get too complacent, particularly at a time when valuations look high.

Time for value stocks

It has been a positive year for growth stocks across the world, with the so-called ‘FAANG’ US technology giants leading the way ((Facebook, Apple, Amazon, Netflix, Google).

However, cheaper ‘value’ stocks started to stage a comeback in December and some professional investors suggest this could be a trend to watch in 2018.

‘Will value investing be the comeback kid of 2018? It’s too early to tell, but it’s hard to believe that the market will continue to be as narrowly led by FAANG stocks as in 2017,’ said Damian Barry, senior investment manager at Seven Investment Management.

With this in mind, Barry has increased exposure to active fund managers who take a high conviction approach and focus on company fundamentals.

James Clunie, Citywire + rated manager of the Jupiter Absolute Return fund, is watching the valuation gap between growth and value stocks closely.

‘We have seen nascent signs of a reversal of this pattern, which could be important because a stock market rotation out of growth into value is something that has been witnessed in the run-up to a number of financial downturns,’ he explained.

Digital disruption

A number of commentators highlight ‘digital disruption’ as a theme to watch as businesses look to articial intelligence and automation to open new markets or serve existing customers more efficiently.

Alexander Darwall, Citywire AA-rated manager of Jupiter European fund, and also the Jupiter European Opportunities (JEO ) investment trust, says the interconnections of the online world created many investment opportunities.

‘The “internet of things” is still in a very early phase but it impacts most sectors, from automation in the shipping industry to bookings in the tourism industry. We also have no doubt that there is more to come from cybersecurity disruption. As ever, there will be winners from that process, too,’ Darwall said.

Mark Williams, manager of the Liontrust Asia Income fund, believes China is leading the global adoption of technology. ‘China is unique in terms of the scale and speed of acceptance of new technology,’ he said.

‘Bike-sharing services complete 70 million bookings a day and have become a short-distance mobility option, disrupting Didi, the dominant ride-sharing platform, for the 1-2 km distance fares,’ Williams added.

He expects to see more things operating autonomously or semi-autonomously. For example, a robotic vacuum cleaner with computerised vision can now navigate and clean a house with minimal intervention.

Brace yourself

Markets were remarkably placid last year after the wild swings of 2016, a feature that Kames Capital’s chief investment officer Stephen Jones did not expect to continue in 2018.

‘It is probably naïve to anticipate that markets will go up in a similar “straight line” as they have this year,’ Jones said.

If volatility does return, he suspects it will be driven by bond markets which look expensive if interest rates rise more quickly than expected.

‘Another year of economic good news will embolden those calling, yet again, for higher long-term interest rates. But unless inflation rises materially and sustainably – which I doubt – then bond yields seem likely to remain at levels which offer support to equity markets (rather than emerge as a competitive alternative),’ he reassured.

Peter Michaelis, head of sustainable investment at Liontrust, suspects there will be higher levels of volatility in both shares and corporate bonds this year.

‘With rising interest rates in 2018, we should expect this. This will offer an advantage to active managers who can use dips to buy oversold, high-quality companies,’ Michaelis added.

QE money tap dries up

As central banks begin the process of unwinding quantitative easing (or money printing) at a time when interest rates are rising, one leading fund manager has warned investors not to overlook the potential risks facing bonds.

Jupiter Strategic Bond  fund manager Ariel Bezalel points to a number of warning signs in 2017, which indicate asset bubbles created by quantitative easing and low interest rates. For example, European high yield bonds trading in line with US government bonds, or treasuries, for the first time in history, as well as Argentina’s oversubscribed 100-year bond issue – despite the country’s status as a serial defaulter.

‘Now, with the Fed and other central banks around the world seeking to remove the proverbial punch bowl of liquidity, and with valuations across most risk assets (such as corporate bonds and equities) at record highs, 2018 could be a challenging and volatile year for investors,’ Bezalel explained.

While the Fed is forecasting an uptick in inflation in 2018, Bezalel does not agree.
‘We believe that long-term trends such as ageing populations, an overly indebted world, and the disruption brought about by technology are all factors likely to suppress economic growth and inflation for longer than many people may think,’ he said.

Given the uncertain backdrop, the fund manager has reduced risk by increasing the quality of the bonds held in the portfolio. He has reduced high yield exposure in favour of developed market government bonds, such as treasuries. The fund also has an allocation to emerging market debt and several special situations that are likely to benefit from companies reducing their debts and improving their credit ratings.

Will property disappoint?

As valuations across both bonds and equities both look high, the hunt is on for genuine alternatives that offer investors diversification away from mainstream asset classes. This represents a major challenge for investors, according to Alex Scott, chief investment officer at Seven.

‘One of the key questions for multi-asset managers and investors alike is perhaps the issue of how do you adequately diversify portfolios? The days when it was as simple as buying government bonds are long gone,’ he noted.

He warns that not all alternatives are uncorrelated to mainstream assets and cites real estate funds as a prime example, as they may prove to be too exposed to the UK economy.

Looking ahead to 2018, David Wise, co-manager of the Kames Property Income fund, is forecasting a correction in the London property market.

‘London is, as expected, showing signs of slowing down as the government works its way through the Brexit negotiations, and we believe the London market is at a late-cycle stage so we expect a correction/ slowdown in the future, but not a crash,’ he said.

With this in mind, his fund has only 1.1% allocated to central London. Instead, like some other property investors he favours regions outside the capital such as the North West and Yorkshire.

Commodities surprise

Mining stocks have been a success story of the past two years. The sector has seen profits and cashflow improve, and dividends payments return, driving share price performance.
Following a strong 2017 – can the momentum continue?

Tom Holl, manager of the BlackRock Commodities Income (BRCI ) investment trust, says the health of the Chinese economy is likely to weigh on the prospects of the mining sector this year.

‘It is a huge economy and creates a considerable part of global demand for commodities, however despite the risks we believe the Chinese administration has shown itself willing and able to step in to support the economy,’ he explained.

Holl says commodities stocks are likely to be supported by improved global economic growth, as well as initiatives that are already in place improve balance sheets and lower debt across many companies.

‘This improvement should help companies to deliver more stable profits looking forward to next year. While the mining sector has performed strongly, it is still some way below the peak in 2011. Commodity prices have stabilised, and we believe this stability will continue moving forward,’ Holl added.


6 comments so far. Why not have your say?

CCT.

Jan 07, 2018 at 09:36

What I would really like to know is has anyone developed a fairly good stop loss system I know nothing is perfect, but it would be nice to have something to stick to without chewing ones nails. Thank you.

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Law Man

Jan 07, 2018 at 09:55

CCT: This is purely a personal view, appropriate for me:

.

(1) long term investments: do not use stop losses. Rather monitor indicators of an impending bear fall such as an index falling below 200 day moving average, and on this sell some equities;

.

(2) individual share trading: set a trailing stop loss at a multiple of the 'Average True Range' e.g. 4 or 7 times [this needs software e.g. Stockopedia], and sell the individual stock if it falls below this. You will make many small losses, but run large profits on the winners.

.

Of course others will have equally good ideas.

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CCT.

Jan 07, 2018 at 14:28

Thank you Law man I do try to treat my shares as my own investment trust .

This way I hold no feeling towards them. Only if the report is rosy and the next day they drop dead then one feels a bit peeved. Thanks again.

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Colin Gregg

Jan 07, 2018 at 15:49

One method I use - and have just done so with my holding in Scottish Mortgage Trust (SMT), the growth of which this year has been well-reported - is to sell out sufficient shares to....

* either recoup the original capital outlay, leaving you "in it for nothing"...

* or to slice off the profit made, leaving the original investment intact

Neither method is a stop-loss as such, but it does allow you to crystallize a gain without fully selling out of your holding just because of fear of what might be round the corner.

If the crash materialises, then you've not lost it all, and you've got capital available to go back in when the market's lower.

If the crash doesn't happen, then your remaining holding can go on growing without you having to give yourself a good kicking for getting out too soon!

Just my thoughts....and I'm generally in for the long-term.

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CCT.

Jan 07, 2018 at 15:57

Thank you Colin . I appreciate your feed back. I remember when we all got caught with bank shares and tech. That was hairy.

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horshamtim

Jan 09, 2018 at 07:02

Good to see a thread on this site where all the comments are sensible!

For my non-core investments I have certainly done what Colin has done, so running with a freebie as a speculative punt.

For the core investments, I start with my financial objectives - does the investment still help me meet these? I periodically rebalance the holdings against the current sector allocation to make sure it doesn't get too skewed.

For the individual stocks and shares I go with the view that a good question is whether you would still buy it - I tend to focus on a few key financial ratios. If they go below their 10 month moving average line I will consider selling, particularly if there are doubts on the underlying finances. This got me out in time to avoid the big drops on Carillion for example, although I should have sold a few months earlier. Like all rules, being too mechanistic can cause problems.

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