Investment themes to watch in 2017
Luigi Marinus, Senior Investment Analyst at PPS Investments.
Most people would not have predicted that offshore assets would end up becoming the worst performers in 2016 after being the best performing assets in 2015. And it is unlikely that the world thought a Trump presidency or Brexit were possible, or that it would be George Michael’s last Christmas. 2016 showed us that surprises are part of the course. Similarly, there is likely more in store for 2017. To help you prepare we discuss some of the strong themes likely to dominate financial markets in 2017. These reinforce the importance of creating robust and well-diversified investment portfolios and maintaining a long-term mindset.
POLITICAL UNCERTAINTY: In general, political uncertainty locally and abroad is likely to remain one of the major themes of 2017, and will certainly have an effect on the prosperity of financial markets. Among others, the Brexit vote and election of Donald Trump as US president were the most prominent surprise developments that led to volatility in financial markets during 2016. This will further play out in 2017 as Article 50 of the Treaty of Lisbon is triggered and Trump starts his tenure in the White House’s Oval Office. Developed world rhetoric has a conservative tone and one that is less conducive to the growth of globalisation experienced in the previous few decades. All this is happening at a time when global GDP growth is disappointing.
INTEREST RATES: Another global investment theme for 2017 is the path of inflation and interest rates. Since 2009, interest rates, particularly in the developed world have been at or near record-low levels, coupled with quantitative easing. This helped to drive bond yields to unprecedentedly low levels, and more recently to negative yields, making equities the asset class of choice, often as a result of a lack of alternative options. While the latest moves by the UK and EU have been to further drop interest rates, the US opted for hikes towards the end of 2015 and 2016. Admittedly, US interest rates are still low, but further rate hikes in 2017 could lead to the end of the availability of cheap money, a consequent hurdle to company profitability and a drop in demand for emerging market debt.
RATINGS DOWNGRADE: From a South African perspective arguably the most spoken about investment concern in 2016 was the potential downgrading of South African debt to sub-investment grade. This did not materialise in 2016, but will again be of concern in 2017. High unemployment and low economic growth remain the major stumbling blocks facing South Africa when it comes to rating agency concerns. Even though it may be argued that certain economies that have experienced downgrades have become more focused on turning things around, the consequences for an economy with a negative current account balance and volatile trade balance, like South Africa, are unlikely to be positive.
RETURN EXPECTATIONS: What are the markets going to do in 2017? Anyone that has been involved in the financial markets for any length of time will know that not only is 12 months a very short investment horizon, but forecasting in general is prone to error. What can be said is that local valuations, especially when aggregated across equity sectors, look expensive. Company earnings have largely disappointed and the market seems to be indicating that return expectations need to be moderated. This of course affords proven stock picking managers the opportunity to differentiate themselves, as an emphasis on certain pockets of the market may provide improved results. The prospect for the fixed interest market is likely to be heavily influenced by rating agency announcements in 2017, but bonds are starting the year at better-than-inflation-level yields, which is enticing to investors.
DIVERSIFICATION: This is probably the most important theme for 2017. Not only does this involve having allocations to different asset classes but for 2017 in particular it requires a careful consideration of the balance between risk and reward. It is natural to view the uncertainties in 2017 as ominous, but in order to reach investment goals a certain level of risk needs to be assumed.
In light of the aforementioned themes, as multi-managers entrusted with clients’ investments, we have the added diversification advantage of combining managers with different investment styles that will have different results should any unforeseen outcomes occur. While this does talk to a strategy that is not about chasing performance in 2017 it shows a requirement to bring various different strategies together to deliver an acceptable result regardless of the uncertainties that will play out over the next 12 months.
