New Year’s resolutions from our fund managers
For adviser use only
With introduction from Nick Dixon, Investment Director at Aegon
2016 was a bad year for pollsters as the angry electorate decided to give the establishment a collective kick in the ‘whatsits’. However, UK investors looked beyond the experts’ pessimistic views and basked in the jollier-than-expected consequences of Trump’s election win and Brexit, as sterling’s nose-dive boosted global asset values.
I read recently that Trumpery comes from the French word ‘tromper’ meaning to deceive and that it’s an old English word for ‘showy but worthless’. The extent to which the president-elect lives up to his name will preoccupy markets during much of 2017. So far, markets have reacted positively to Trump’s commitment to fiscal stimulus and de-regulation and, like Ronald Regan, Trump may turn out to be a better president than candidate.
For 2017, I predict that the pollsters and the expert establishment will have another bad year, but that investors will have a good year if they have the backing of experienced advisers and fund managers.
Wishing you all an alpha-busting top quartile 2017.
Read on to see some of our managers’ expectations for 2017.
Baillie Gifford resolves to stay nimble
Large parts of the world appear to have been growing above trend for a while now. This should continue for some time yet. However, as unemployment continues to fall, so wage and inflationary pressures may increase. Added to this, we have seen a sharp rise in government bond yields recently. In combination, the chance of a shake-up across various asset classes has gone up. I expect to see us owning more real assets and taking clear advantage of market volatility.
We will keep as open a mind as possible. There are a number of important political stories and risk scenarios to be mindful of - most obviously Donald Trump's presidency. Our resolutions? Much the same as in previous years! To explore all scenarios, take advantage of opportunities as they present themselves and maintain a well-diversified, robust portfolio.
Schroders stages its own Brexit – wary of European assets
The first risk we foresee in 2017 is Trump's protectionist stance, which casts a shadow over our emerging market exposure. He is likely to emphasise"fair trade" over"free trade" but whether that will take the form of tariffs remains to be seen. More concerning is that global trade growth remains absent, irrespective of Trump's victory. For now, we continue to own emerging-market assets because they look cheap but we have hedged some of our exposure with long US dollar positions against lower yielding Asian currencies.
The second risk is the sell-off in government bonds and the strength of the US dollar, which are tightening monetary conditions in the US. There is a calibrating effect of bonds and currencies on growth which has so far obviated the need for aggressive monetary tightening by the Fed. With the US still the main growth engine of the world, we cannot afford for it to sputter.
Third, European politics could be the wildcard for 2017. With a number of significant elections, a clear anti-establishment mood and a dormant sovereign debt problem, we remain vigilant on this front and avoid European assets for now.
Kames to stick to long-term fundamentals
The surprise election of Donald Trump, following the unexpected UK referendum result, adds weight to the argument that the political cycle is turning. As politicians edge away from the austerity of the last six years they will receive little push-back from central bankers who have long been calling for more help from fiscal policy.
Into 2017, inflation expectations are rising around the world and bond yields look set to test the multi-decade downtrend. History does suggest that there can be a limited sweet spot in which equities continue to perform whilst bond yields are rising. Perhaps though, the only certainty is that uncertainty leads to market volatility and next year promises to offer further potential risk events. Investors will have to navigate, for example, elections in Europe (including Germany and France), the realities of a Trump presidency and Brexit negotiations in the UK.
So, our resolution is to maintain our focus on the long-term fundamentals.
Newton will be guided by what politicians do, not what they say
The investment landscape is moving on from relying on constant support from central banks to growing influence from governments. The angry electorate has prompted this ongoing change and we will see an increasing desire to placate those anti-establishment groups. Whether it works in the long term may not worry investors but the variety of different solutions coming from governments will keep fund managers busy trying to work out the near term influences.
As a result, there will be an increased chance to differentiate performance during these periods of volatility.
So my resolution will be to take advantage of the diverging economic trends and not be complacent. While recognising that politics is dominant, listen to what politicians say, understand what they mean, but don’t lose sight of what they can actually deliver (they are three different things).