Nick Peters, multi-asset portfolio manager, Fidelity International
Equities
Equities should continue to reward investors in 2017 but sector and style allocation will be just as important as country allocation. Value investing should outperform growth, with financials leading value sectors higher – in marked contrast to 2016 when we saw commodities leading a (muted) value charge. I would be overweight Japanese equities, where the market has not yet registered more positive economic data. While the US economy remains robust much of this is priced in, and there’s potential for significant disappointment, particularly if Donald Trump’s campaign rhetoric proves to be a more accurate indication of his policy positions than many in markets are hoping for.
Bond yields
While our base case is for tighter monetary policy in the year ahead, the pace of the moves in recent weeks could make central banks like the Fed nervous of tightening policy, particularly with US dollar strength having already tightened financial conditions. Given this outlook, a barbell strategy looks like a sensible approach for 2017 – much as it was for 2016. This involves adding to defensive fixed income assets like US Treasuries as yields rise, but counterbalancing this with higher yielding exposure like high-yield bonds and local currency emerging market debt. The latter is a particularly high-conviction view, with its high yields offering an attractive income, valuation support and protection should bond yields normalise across fixed income markets.
Property
Reits have sold off in line with fixed income markets recently, as the potential for higher inflation lessens the attraction of their income payments. We have been negative on Reits for some time, and continue to be so due to our outlook for higher interest rates. Investors can invest in physical property rather than Reits, though this form of exposure is much less liquid (as we saw post-Brexit). Many investors are now looking beyond the UK and aiming to diversify their property exposure to European assets too.
Commodities
Commodities should continue to benefit from a positive global backdrop, with our leading indicator showing that the global economy is still in positive and improving territory. The metals and mining sector does face a challenging outlook, with a structurally slowing China likely to weaken demand growth going forward. The outlook for oil continues to be positive, however, with an ongoing rebalancing in supply and demand driving falling inventories globally.
Cash
With interest rates so low, cash is really only valuable as a short-term defensive asset, ready to be deployed on market weakness. A view on cash is really a question of whether you think markets will sell off in the near term. There are plenty of potential catalysts for this, ranging from tighter monetary policy globally to the Chinese authorities attempting to rein in stimulus as they grow more concerned about unsustainable, investment-reliant growth. Investors may want to keep some powder dry to take advantage of market volatility and opportunities to add to risk assets on weakness.
Christopher Mahon, director of asset allocation research and investment director, Barings
Equities
Since the election of Donald Trump, US equities have rallied hard. This is despite the strong dollar, which will hurt US dollar earnings. This could continue until the market sees the size of the monetary stimulus coming from Mr Trump. Given the fiscal conservatism within the Republican Party, the stimulus is likely to fall into the ‘buy the rumour, sell the fact’ category. At that stage, the unloved markets of Japan and Europe will get their chance to shine, as the market will focus on the cheaper areas with less drag from higher interest rates.
Bond yields
The most obvious mispricing in the fixed income markets was inflation. Core inflation is a little over 2 per cent. Logically, inflation expectations should also be a little over 2 per cent. The Trump effect has removed this anomaly, yielding healthy profits for owners of this “breakeven inflation” trade. Now for the harder question: will Donald Trump’s stimulus plans create real inflation, rather than just cure the disinflation of yesteryear? We doubt it, as underlying disinflationary trends are exacerbated by the strong dollar and the weak Chinese yuan.
Property
We expect property to return low single digits – it is hard to see global commercial property delivering much after the rise in bond yields. Property is a long-duration asset, and slowly but surely property valuations will need to play catch-up with the creeping rise in rates. Within the UK, commercial property will suffer from the Brexit hangover. We prefer to orient exposure away from London towards other regions, to avoid financial services exposure given the negotiation uncertainty.
Commodities
Gold and silver will continue to derate as interest rates drift upwards. Metals don’t yield anything, so any Fed interest rate rises will weigh on the price. If the unwind proves ugly, it will be an opportunity to buy. Helicopter money will have to be used at the next recession (whenever that is) as rates cannot be cut any further. Thus, any major weakness in precious metals will be an opportunity to build up the hedge that will work come the next downturn.
Cash
Cash might not yield anything but, given where we are in the cycle, it will be increasingly useful as a diversifier. The ABC of investing (which stands for ‘anything but cash’) is getting long in the tooth. We expect to have to use cash quite proactively over the next year.
Peter Elston, chief investment officer, Seneca Investment Managers
Equities
As with emerging market debt and high yield, we are generally at that point in the cycle when equities can continue to make progress – it’s when monetary policy has been tightened significantly and is likely to impact employment growth that one needs to worry, but that is some way off. The US cycle is more advanced than that of the UK – which is ahead of both Europe and Japan – so we’re a little more cautious about the US but this is a relative call not an absolute one. Asia ex Japan and emerging markets are more about structural growth than cycles so I would be broadly positive unless valuations were stretched – which they’re not. Indeed, valuations in developed markets are still OK.
Bond yields
Developed sovereigns are still horribly expensive but they’ve fallen quite a lot in recent months (yields have risen) so they could take a breather. Looking beyond the first quarter, I would expect them to resume their downward path as we’re at that point in the cycle when inflation should continue to rise. And real yields often move with inflation so that would compound things. As for other areas of the fixed income spectrum, such as emerging market debt and high yield, the outlook is still fairly positive with global growth nudging up and ahead of expectations. Yields and spreads are generally close to historic averages but that does not mean they can’t move lower.
Property
It’s hard enough generalising with equities and bonds but with property it is particularly hard. It is such a heterogeneous asset class, with so many variants at work such as type, geography, lot size and the extent to which a building requires more active asset management. It is the specifics of a property that determine its price performance rather than general trends. That said, property in general tends to have both equity and bond characteristics. Rising interest rates would be negative but stronger economic growth that prompted a rise in interest rates would be positive. We’re probably at the point where the latter predominates, which bodes reasonably well for the sector.
Commodities
There are few common factors between energy, precious metals, industrial metals and agricultural commodities. Furthermore, there are few price linkages between coffee and wheat or between aluminium and nickel. What can be said for them as investments is that they don’t yield anything – in fact they are negative yielding once storage costs are accounted for. My general view about commodities is that over time, like foreign exchange, they provide little in the way of return but lots in the way of volatility.
Cash
Given where interest rates are – and will likely be for some time to come – cash can only be attractive in relative terms (relative to other asset classes). Furthermore, rising inflation will make cash even more unattractive in absolute terms. Given my broadly positive view on so-called risky assets, I would continue to maintain low-ish cash weightings.
