Whitechurch Asset Views - January 2017
Global stockmarkets finished the year strongly, and 2017 has started with the same optimism pushing UK and US markets to reach new record levels. However, it feels like we are in for another rollercoaster of a year, and if markets do continue to climb it will be on ‘a wall of worry’.
In the UK investors could spend many (largely wasted) hours concerning themselves with what form Brexit will take. The level of unpredictability is reflected in the wide-ranging forecasts for UK growth in 2017, which range from the economy flat-lining, to expectations of the economy growing in excess of 2%. Inflation is back on the agenda and the value of the pound will have a big influence on market winners and losers.
Overseas, the unpredictability of Donald Trump’s policies will undoubtedly remain at the centre of investor minds, with his twitter account having the ability to move markets. Rising US interest rates may prove a headwind and his foreign policies will be a key driver as to whether 2016’s recovery in Asia and Emerging Markets can continue. In Europe, we will see a raft of elections and the risks of rising populism causing a volatile political backdrop.
Investors dislike uncertainty but the unpredictable nature of events is not a reason in itself to not invest. Indeed, should you have correctly predicted the shock events of 2016 at the start of last year you may also have preferred to hide in cash and would have missed double-digit returns across most global equity and bond markets last year.
In fact, we believe that 2017 can provide many opportunities for those prepared to ignore short-term noise, focus on valuations and take a longer-term perspective. We believe that the following themes will be important in following a successful investment strategy, in a year when cash is likely to be eroded by inflation and generate a negative real return.
Employing a barbell approach: in an environment where we expect markets to be driven by short-term political news-flow, having no strong view is probably the right view for 2017! Rather than trying to make big calls on unpredictable factors, our focus is to take a ‘barbell approach’ and diversify risks across portfolios, assessing which assets offer the best risk adjusted returns on a longer-term view.
Focus on dividends: with inflation eroding miserly returns from saving accounts and bond markets exposed to inflationary risk we maintain our favour for dividend producing shares at home and overseas. But companies who can grow dividends faster than inflation will be favoured over higher yielding bond proxies.
Manage bond exposure carefully in 2017: seek inflation protection and minimise interest rate risk. However, we are not convinced the bond bubble is bursting as we do not see an economic climate strong enough to support interest rate rises across the globe. The US is perhaps the only major economy where we will see rising rates (and three rates are already priced in).
Manage currency risk: the weak pound has been driving investment returns since the Brexit vote. Predicting currencies is a thankless task but it is important to manage the risks. Sterling could remain under pressure but is close to a thirty-year low versus the dollar. If the pound should rally on better than expected news-flow, then a lot of last year’s top performers could be bottom of the pile in 2017.
Focus on value investing: high quality, global leading businesses that can grow profits in a harsh economic backdrop have been the darlings of the stockmarket in recent years. However, this changed in 2016 as optimism over higher economic growth and a return of inflation saw undervalued cyclical stocks returning to favour. We have been adding ‘value’ funds as part of our barbell strategy across global stockmarkets.
A return to stock-picking: with regulators castigating active managers and many indices hitting new highs, 2016 has been a good year to be a passive investor! However, the tailwinds that have driven UK mega-caps in 2016 (weak pound, oil / commodity price recovery) may not drive indices higher in 2017. US exporting blue chips could face headwinds from Trumponomics, compared to smaller domestically focused companies; whilst a potential for recovery in value stocks means good stockpickers looking for contrarian special situations have good opportunities to outperform in 2017.