Autumn Investment Monitor 2017  

Autumn Investment Monitor: Asset class grid

Autumn Investment Monitor: Asset class grid

As the third quarter of 2017 nears its close, Investment Adviser’s Taha Lokhandwala asks investment managers which asset classes and regions look attractive this year and next

Peter Elston, chief investment officer at Seneca Investment Management

UK equities: We are living in a world of weak inflation, the reasons for which are varied and complex. These pressures are easing but only slowly, meaning that real interest rates at both ends of the curve in general remain negative. As a result, if you sell equities because you think they’re expensive, you will soon realise your options are not great. This could mean that equity valuations continue to rise. In the UK, positive real interest rates are a long way off, so equities here can continue to rise.

European equities: If inflation pressures are weak in the UK, they’re even weaker in Europe. This is because unemployment in Europe has only fallen to 9.1 per cent, having peaked much later and at higher levels than in other regions. With unemployment where it is, wage pressures remain subdued. This is not the case across the board. Germany’s labour market is now quite tight, but the central bank is ultimately concerned with the eurozone as a whole, so monetary policy is likely to remain loose. Therefore, the outlook for European equities continues to be rosy.

US equities: The US economy is arguably the only one of the major developed countries that has entered the expansion phase, the point at which inflation pressures become entrenched. True, inflation in recent months has fallen slightly, but this is expected to reverse soon with the continued improvement in the labour market. I expect the Fed to continue to raise interest rates over the coming months, and perhaps even begin to shrink its balance sheet, the combination of which is likely to constrain equity markets.

Emerging market equities: It is always hard to generalise about emerging markets as it is such a heterogeneous asset class. Even the four Bric countries have little in common. That said, there are signs of improvement in a number of key emerging countries, with inflation falling where it was too high (Russia, Brazil and India) and rising where it was too low (China). Brazil appears to be getting to grips with its difficulties on the political and economic front, which will help investor sentiment. So selectively, and cautiously, I’m optimistic.

Fixed income: With interest rates negative, inflation low and the global economy making progress, the prospects for bonds in the developed world are dim. Safe-haven bonds are generally considered good insurance, but in the past this insurance has been reasonably priced. It may now be better to protect with a strong security system rather than expensive insurance. Look for safer income elsewhere, such as infrastructure and certain real estate trusts, where not only are yields higher but there is also inflation protection.